Jan. 31 (Bloomberg) -- Oil, which has dropped 27 percent from the record reached in July, may fall to $45 a barrel by 2011 as output increases and demand growth slows, said Royal Bank of Scotland Plc, the U.K's second-largest lender.

Prices of oil, which rose more than fourfold between 2002 and 2006, bolstered investments in securing supplies from conventional and alternative sources, said Thorsten Fischer, an analyst at the Edinburgh-based bank. Coupled with slowing global energy demand, that will create spare capacity, he said

``The risk of severe supply disruption has receded,'' Fischer said in a Jan. 29 report. ``Strong investment and drilling activity over the last few years will bring new supplies online., while demand growth will return to more sustainable levels.''

Fischer's forecast is a reiteration of views he put forward last January. Oil has fallen 16 percent in the last year. Still, he failed to predict the strength of oil prices in the first seven months of the year. He said oil in New York would average $52.50 a barrel in 2006. It averaged $66.25 in New York last and reached a record $78.40 on July 14.

The boom in exploration and drilling worldwide will bring additional supplies, said Fischer. The number of active rigs in the Middle East rose 36 percent to 255 in the five years to December 2006, according to Baker Hughes Inc.

In Asia, where China and India are racing to secure energy assets to sustain rapid economic growth, the number of active rigs jumped by 70, or 42 percent, to 235 over the same period.

Slowing Demand

Saudi Aramco, the world's largest state oil company, plans to spend $80 billion over five years to increase crude production, company vice president Khalid Al-Falih said at an industry conference in November.

As supply climbs, demand growth will slow as consumers economize and governments push the use of renewable fuels and encourage fuel efficiency, Fischer said.

The International Energy Agency, an advisor to 26 nations, on Jan. 18 cut its forecast for global oil demand this year because of a milder-than-usual winter in the U.S. and Europe has sapped demand for heating fuel.

The IEA predicts world demand will rise 1.6 percent this year to 85.77 million barrels a day, 160,000 barrels a day less than its forecast in December. The cut was due to weaker economic growth in the U.S., the world's biggest energy user, and lower-than-expected oil demand in the former Soviet Union.

Japan Consumption

Gasoline consumption in Japan, Asia's biggest user of the auto fuel after China, fell for the first time in 32 years in 2006 after high oil prices and a shift to smaller and more fuel- efficient cars cut fuel consumption.

Increasing use of biofuels, including ethanol and biodiesel, will further cut crude oil consumption, the RBS report said. The IEA estimates that biofuel output may rise to the equivalent of more than five million barrels of crude oil a day by 2001, triple the volume in 2005.

Still, oil's decline from a record has prompted the Organization of Petroleum Exporting Countries to deepen output cuts and they may act again, Fischer said.

``The real threat is that OPEC succeeds again in controlling prices,'' said Fischer in the report. ``With slowing demand growth and growing excess capacity, it will become more difficult for OPEC to enforce its quotas.''

OPEC, the producer of 40 percent of the world's oil, agreed at the December meeting in Abuja to cut output by a further 500,000 barrels a day from Feb. 1. This was a second output cut after the cartel agreed in October to implement a 1.2 million barrels a day cut starting Nov. 1.

To contact the reporter on this story: Trisha Huang in Singapore at thuang14@bloomberg.net.

Last Updated: January 31, 2007 04:21 EST