...I am not thinking of doing any painting and I may not use an air drill so can a 12 gal oil lub, 125psi air compressor do the job of building an RV? ...).
Can it? ... Yes.
Will you enjoy it? ... Probably not.
Depending on your time frame and patience you can use an electric drill to build an RV. The RV's, especially the "Quick Build" kits, do not require a lot of heavy drilling into big chunks of metal such as spars, so you don't necessarily need heavy equipment. (If you're building an RV-12 I'd think this would be especially true.)
If the cost of the compressor is an issue then I'll assume you're not going the "Quick Build" route, which means you'll be drilling a lot of holes. Not to mention all the riveting. A small 12 gal compressor will run constantly while drilling and most of these little buggers are pretty noisy. So consider fatigue factor. Plus with small compressors you can often feel the drill changing speeds and getting hot in your hand since the drill is using air faster than the compressor can refill the canister. This is bad for your drill, not to mention the round hole you're trying to make. Most of the air drills like to have 90 psi at the gun to maintain correct speed and the little compressors just can't keep up when doing a lot of work or drilling into a thick piece of aluminum.
I started my -8 project with a 20 gallon, 5 hp Craftsman compressor. It ran constantly, was extremely noisy and just drove me nuts. I frequently had to stop what I was doing and wait for the compressor to refill sufficiently so I could drill again. I finally bought an 80 gallon compressor and never regretted the decision. Though 80 gallons may be a bit of overkill, the compressor motor would run maybe once an evening to refill the tank. It was blessedly quiet the rest of the time.
Just my two cents but I say buy something larger, at least 60 gallons. Look around the classifieds for a used one -- I suspect there are builders out there who want to sell their compressor once finished their project.
To your original question -- yes you can use a small compressor. It's just a matter of what trade offs you're willing to make.
Chris