How much should we worry about running out of oil? Of late, there have been disparate predictions for our oil reserves, with some claiming that oil will last us for decades. In fact, the question is not so much: "When will there be no more oil left for us to take?" but, rather: "When will demand outstrip production?" And that could happen sooner than most people realise. This is an issue that governments around the world, including our own, are ignoring despite the potential risk to our economies.

Conventional oil production has a limited capacity. Most additional demand must be met by unconventional sources, which are abundant. But the capacity for production depends on the effective management of environmental, social and technical challenges that unconventional sources pose. The current disaster in the Gulf of Mexico is a clear indicator of how these boundaries are being pushed.

The most significant concern is transport; while there are many other ways to provide heat, light and electricity, liquid transportation fuels would be hard to come by if oil supply dried up.

The International Energy Authority (IEA) predicts that over the next 20 years there will be a steady increase in demand for liquid fuels, most of which will come from China and India. It also predicts that the supply of oil from fields that are currently in production will plummet over the same time frame.

There will be additional sources of oil to help fill this gap – from fields that have been found but not yet exploited, from those yet to be found, and from unconventional sources such as Canada's tar sands (though this is costly and particularly damaging from the point of view of climate). There is also the possibility of converting natural gas to liquid fuels. However, even adding all these into the mix, the IEA notes that there will still be a significant shortfall between demand and supply.

Moreover, some of the estimates of future supply look overly optimistic. Analysis from my institute, the Smith School, suggests that by taking the Opec figures at face value, the IEA is overestimating the reserves in fields yet to be developed by some 30%, making the shortfall even worse.

The bottom line is that demand for liquid fuels is virtually certain to outstrip production by a considerable margin over the next two decades, regardless of how much oil remains in the ground.

Knowing this, can't oil companies simply boost their production rates or find other options? Shell recently built a plant to convert natural gas to liquid fuels in Qatar, but at some $20bn, the capital costs were enormous. Such plants can only hope to provide a sensible return on investment in the few places in the world where natural gas is plentiful. As for biofuels, although the US is likely to hit 10% of biofuels for cars later this year, globally these fuels are still only a tiny percentage of the total.

Thus, as the world emerges from the current economic downturn, all the evidence is that oil prices will take a substantial hike. Our analysis predicts that prices will soon be considerably more than $100 a barrel, peaking at around $130 by 2015. This in itself is likely to stall the global economic recovery following the financial debt crisis.

In principle, that's good news for oil-rich countries such as Norway and the Gulf states, where higher prices mean higher GDP. But most countries in the world are oil importers and as prices rise their economies will suffer. Developing countries will be especially vulnerable, as their economies depend heavily on manufacturing and distribution, which are, in turn, dependent on transport fuels. Take Rwanda, an ambitious country whose economy is currently growing by 8% to 9% per year. We estimate that rises in oil prices over the next two decades will cumulatively cost Rwanda some 30% of its GDP.

That's a large number. As scientific adviser to the Rwandan president, Paul Kagame, I have recommended that the country should do everything in its power to decouple its economy from oil. But Rwanda is by no means atypical. In the face of rising oil prices, most net importers of oil around the world will face further recession if they have not found other ways to move themselves and their goods around. The coming supply crisis provides a clear imperative to all who are dependent on oil imports to find ways to kick the habit.

What, then, should we do? There is no silver bullet. To achieve this necessary change, we will need every weapon at our disposal. Improving the energy efficiency of our transportation will be crucial – by reducing air friction, improving engines and running smaller, lighter vehicles. Alternative fuels will also be important, moving from petrol to new generations of biofuels, hydrogen fuel cells and electric vehicles.

But we will also need to go beyond the designs of the vehicles and fuels themselves and look at changing urban design, building and improving mass transportation systems and changing the ways that people drive.

This, of course, is independent of the additional, but pressing imperative to reduce carbon emissions and prevent dangerous climate change. Put the two together and the case for change becomes overwhelming.

There's a final reason to wean ourselves off our current dependency on oil. In these difficult economic times, we need to stop bleeding our economies by pouring money into the handful of countries that hold most of the oil.

Today, the rest of the world pours more than $2 trillion a year into the Gulf states, which is $6bn per day. This money would surely be better spent developing energy resources that are much closer to home?

Sir David King, director of the Smith School of Enterprise and the Environment at Oxford, was chief scientific adviser to the government from 2000 to 2007

• This article was amended on 14 June 2010. The original stated that $2 trillion a year equated to $6m per day. The latter figure should have read $6bn. This has now been correctecd