Spare oil and gas production capacity is rising fast and will keep rising due to falling oil demand and supply oil companies have been working on, oil analyst and writer Daniel Yergin told a U.K. oil summit hosted by Prime Minister Gordon Brown at the weekend.

The famed Cambridge Energy Research Associates researcher told an assembly of energy ministers at the London summit that today’s oil price now marked the state of the world economy.

In their report, Recession Shock: The Impact of the Economic and Financial Crisis on the Oil Market, CERA researchers suggest spare capacity could expand to 2012.

“As low as one million barrels per day in 2005 and 2.4 million barrels per day in 2008, it could reach 8 MM bpd in 2010 to 2012,” Yergin said, adding that in the medium term, low prices and financial constraints would hinder investment.

The world economy isn’t seen eating up spare capacity until a “a new cycle” begins in “by 2014”. For the oil industry, spare capacity will become “a defining factor” for a while.

The summit of energ ministes and CERA report were understood to have been called by PM Brown and was a follow to a similar event in Jeddah, Saudi Arabia this past June.

for London Summit Called by British Prime Minister Gordon Brown.

The report said “demand shock” came before today’s economic worries. It had been fuelled by five years of economic growth, wars and trading.

Meanwhile, U.S. oil demand in 2008 is expected to be a million barrels a day less than in 2007. The last time demand dropped this much was in the deep recession of 1981, according to Yergin, a Pullitzer Prize winner for his book The Prize.

Globally, CERA sees demand decline in 2009 of 660,000 bpd.