So what explains the unprecedented high price of oil? The answer is perhaps not as simple as one might think. Many factors are at play and the debate is rife as to whether the blame lies mostly with the market fundamentals or the oil speculators.

There is a growing mismatch between the demand for and supply of oil. The expansion of emerging economies notably, China and India, has contributed to a rise in the global demand of oil by about 3 million barrels a day since 2005, putting intense pressure on existing stockpiles and refineries.

In addition, major supply constraints have become apparent. 55 percent of oil exports are accounted for by the Organisation of Petroleum Exporting Countries (OPEC) but few of its members actually have the ability to substantially increase output beyond what they are already producing. Many of the functioning refineries have simply not been modernised and represent an important infrastructural impediment to boosting oil production. The main oil producing regions are, for the most part, plagued by political instability which tends to cause disruptions to supplies while pumping oil from new and often more difficultly accessible fields to keep up with the growing pace of demand is typically an expensive venture.

Oil producers as well as some policy makers and analysts, on the other hand, are of the view that market speculation and the weak dollar have played a significant part in spurring the rapid increase in the price of oil. Speculators have been involved in heavy trading in oil futures contracts which essentially amounts to betting on the future movement in oil prices. Oil contracts are bought in the hope that their value will go up in the future. The increased speculative investment is believed to be pushing oil prices even higher.

A surge in investment flows out of the dollar into oil futures has also been noted. The low value of the dollar encourages financial investors to swap the currency for dollar-denominated commodities, in particular oil. Interestingly, the process is driven not only by commodity traders but increasingly by pension funds, investment funds, banks and insurance companies.

Critics of the speculation and weak dollar hypotheses, however, claim that transactions on the futures market have limited influence on the price of oil and that these are mainly being used as scapegoats for the lack of spare capacity and low production and inventory levels. Despite the massive increase in trading volumes, investment in oil futures still represents a tiny fraction of the total trade in global oil markets. More importantly, no physical barrels of oil are actually traded in futures transactions and thus there is no possibility of hoarding oil supplies. It is also argued that oil speculators are simply allowing traders to hedge their investment against the future risks on the oil market.

■ The impact on petrol and energy prices domestically</B>