FACTBOX: Why Oil Prices are at a Record High Thursday, 20 September 2007 Reuters
FUNDS
Investment flows from pension and hedge funds into commodities including oil have resumed in recent months after a hiatus earlier in the year due to concerns about how the global economy was moving.
Speculative trading in energy markets has boomed in recent years as investors sought to beat returns in other markets such as equities and bonds.
OPEC SUPPLY RESTRAINT The Organization of the Petroleum Exporting Countries (OPEC), source of more than a third of the world's oil, started to reduce oil output in late 2006 to stem a fall in prices.
Fewer OPEC barrels entering the market helped propel this year's rally and consumer nations led by the International Energy Agency for months urged OPEC to pump more oil. OPEC countered that supplies were adequate.
But at a meeting last week, OPEC decided to increase oil output by 500,000 barrels per day (bpd), equal to about 1.6 percent of production by the 12-member group in August, from Nov. 1.
An OPEC source said the group would probably hold consultations about a further output increase if the price of oil were to stay above $80 a barrel for more than 15 to 20 days.
DOLLAR WEAKNESS
The fall in the value of the US dollar against other major currencies has reduced the purchasing power of OPEC's revenues and increased the purchasing power of some non-dollar consumers.
It has also helped to drive buying across commodities as investors have viewed dollar assets as relatively cheap.
OPEC oil ministers have noted that even though oil prices are rising to record nominal levels, inflation and the dollar have softened the impact.
Mohammed Al-Hamli, the OPEC president, said in July that in real terms, adjusted for inflation and the weak dollar, the cost of a barrel is no higher than it was three decades ago.
DEMAND
While previous price spikes have been triggered by supply disruptions, demand from top consumers China and the US is a main driver of the current rally.
Global demand growth has slowed after a surge in 2004, but it is still rising and higher prices have so far had a very limited effect on economic growth.
Analysts say the world is coping well with high nominal prices because adjusted for exchange rates and inflation, they are lower than during previous price spikes and some economies have become less energy intensive.
NIGERIA
Supply of crude from Nigeria, the world's eighth-largest oil exporter, has been cut since February 2006 because of militant attacks on the country's oil industry.
Oil companies have detailed about 547,000 bpd of shut Nigerian production due to militant attacks and sabotage.
REFINERY BOTTLENECKS
Adding to consumer concern about tight supply of unrefined crude is a global shortage of refining capacity.
Refiners in the US, the world's top gas guzzler, have struggled with unexpected outages this year which drained inventories ahead of the summer, when motor fuel demand peaks.
In the latest weekly figures from the US government, issued on Sept. 12, distillate and heating oil stocks rose, but were still well below their levels of a year ago. Fuel demand is still growing, despite higher prices. Refining capacity is already tight after years of underinvestment.
IRAN
Oil consumers are concerned about supply disruption from Iran, the world's fourth-biggest exporter, which is locked in a dispute with the West over its nuclear program.
Western governments suspect Iran is using its civilian nuclear program as a cover to develop nuclear weapons. Iran denies this, saying it wants nuclear power to make electricity.
IRAQ
Iraq is struggling to get its oil industry back on its feet after decades of wars, sanctions and underinvestment.
Exports of Kirkuk crude from the country's north are sporadic as sabotage and technical problems have mostly idled the pipeline since the US-led invasion of Iraq in March 2003, preventing exports.
