The world’s swelling population and continued economic growth will require increasing volumes of oil to power the cars, trucks, trains and planes that transport people and goods around the planet. But the Citi commodities research team has questioned the extent of that assumption in a new research report titled “Global Oil Demand Growth – the End is Nigh.”

This rethinking of global oil demand trajectory is driven by the analyst’s view that natural gas will increasingly be substituted for oil in the transportation, power generation and industrial sectors, while considerable gains in fuel economy “raise the possibility that the tipping point for oil demand may come much sooner than the markets are expecting.”

Potential gas-to-oil substitution could reduce global oil consumption by 2.3 million barrels of oil equivalent per day by 2020 and 5.5 mmboe/d by 2025 in a low-case scenario, while a high-case scenario could see the world’s oil use decline by 4.9 mmboe/d by 2020 and 13.6 mmboe/d by 2025.

Global oil consumption in 2010 was comprised of the following 10 sectors listed in order from greatest to least consumer: Cars, other industrials, trucks, residential, petrochemicals, electricity, aviation, other transport, shipping and rail. The report points out that in all of those sectors except aviation natural gas is already being substituted for liquid fuels.

“Sanctions limiting Iran’s ability to import gasoline has resulted in Iran becoming the world’s leader in natural gas fuelled vehicles. Since 2005, the number of NGVs has jumped from below fifty thousand, to almost 2.9 million in 2011,” the report says. This trend is also evident in China and the US.

Refining is highlighted in the “Other Industrials” category as a sector where natural gas is providing a competitive and strategic feedstock advantage. “US East Coast refiners, initially expected to shut down in 2012, are finding new lives partly due to the use of cheap natural gas as both the agent to make hydrogen and as an energy source, besides receiving tax breaks and cheap inland crude (e.g. Bakken) transported by rail.”

Hydraulic fracturing is another relatively diesel-intensive industrial process where “there is an accelerating shift to use natural gas to power high horsepower drilling and fracking equipment.”

Shifting from transport to electricity, Middle Eastern countries are aggressively working to substitute natural gas and renewables for crude oil in power generation. “Over 1-mmb/d of power generation demand in the Middle East during recent summers has been met by direct crude burn, with additional volumes of fuel oil and gasoil also being used for power generation, all due to a lack of gas. As Saudi gas production increases in coming years with new field start-ups, and Kuwait shifts to year-round LNG imports this year, gas should back out oil and free it up for export.”

Research is also being conducted into LNG-powered ships and locomotives, notes the report, which together account for several million b/d of oil consumption, though serious infrastructure constraints will need to be overcome before LNG shipping and rail transport become widespread.

There is clearly an economic incentive for all this oil-to-gas substitution given global oil and gas prices today, but if price dynamics shift these assumptions would likely change significantly. However, due to its lower greenhouse gas emissions profile, there would still be an environmental incentive for switching to natural gas.