LONDON: US oil prices set another record on the New York Mercantile Exchange on Tuesday, reaching $44.24 a barrel, the highest since NYMEX launched its crude contract in 1983. Average US prices of $37.40 a barrel so far this year are the highest in nominal terms since 1980, according to BP.

Following are some of the factors behind oil's price surge.

RISING DEMAND

China's economic expansion has given a dramatic boost to world oil demand, sucking in crude and refined products from all around the world. Unless China's economy overheats, traders expect its fuel demand to keep growing for the next two or three years, encouraging big-money speculative hedge funds to bet that high oil prices are here to stay.

Chinese oil demand is forecast to grow another 500,000 bpd, or 8% next year, following this year's projected 14.5% jump as car ownership surges and power generation needs grow.

Indian consumption is growing fast too. And solid growth in the US economy, which devours a quarter or all world oil, is driving competition between Asia and the United States for supplies.

The rate of demand growth caught forecasters such as the International Energy Agency by surprise. Consumption forecasts have proved too low, encouraging OPEC producers to keep supplies tighter than needed to prevent stocks building.

Higher demand means that a shortage of refining capacity that has plagued the United States for the last four years has now spread to Asia, again leaving the global oil supply system more exposed to disruption.

LACK OF SPARE SUPPLY CAPACITY

Since prices hit the $40+ level that threatens to slow economic growth the OPEC producer cartel has surged its production to the highest level in 25 years in an effort to keep prices under control. This has left little spare capacity outside topworld exporter Saudi Arabia.

The strain on the world supply system has left it more vulnerable to supply disruptions and increased the likelihood of price spikes. This has attracted further buying interest from hedge funds betting that prices could go even higher.

"High OPEC output normally expected to ease tightness, is actually having bullish impacts as the markets realise the limits of what OPEC can do," said Washington-based consultants PFC Energy in a report.

Oil companies have also sought to become more efficient and free up capital by holding lower stocks. This has given the industry less of a cushion against sudden supply disruptions.

A wave of mergers following 1998-1999's price crash also reduced the number of companies holding inventory. A series of supply disruptions last year -- the war in Iraq, Venezuela's general strike, and ethnic unrest in Nigeria -- cut into stocks.

OPEC, which controls around half the world's exports, has also in recent years worked hard to stop stocks building, especially in the United States, during periods of seasonally weak demand.

Ministers have announced plans to cut production before prices start to weaken, helping to create the conditions for a sustained price "backwardation," pricing physical oil at a premium to future supplies. This pricing structure gives refiners no chance to replenish stocks with lower-priced crude or products and forces them to buy at the last minute.

POLITICAL TENSIONS

Political tensions in the Middle East and violence in Iraq have undermined traders' confidence in security of supply from the region, which pumps a third of the world's oil. Iraqi exports, not long back to pre-war volumes, have been hit by sabotage attacks.

Traders fear Islamic militants could target oil infrastructure in OPEC's biggest producer Saudi Arabia. May's deadly attacks on foreign oil workers in the Saudi oil city of Khobar fostered fears of a larger attack on the kingdom's tightly protected oil facilities.

The financial crisis at Russian oil giant YUKOS, which produces around 20% of Russia's crude has intensified concerns. The company has warned that it could be forced to cut production as the government pursues payment of $3.4 billion in tax arrears.

Venezuelan oil production is still suffering the fall-out of the strike 18 months ago that cut capacity. A referendum this month on Venezuelan president Hugo Chavez's rule could again destabilize exports from a big US supplier. Civil unrest in OPEC member Nigeria is another flashpoint.

Supply security concerns have spurred many countries to increase strategic inventories, withdrawing supply from an already tight market. The United States continues to fill its strategic petroleum reserve despite high prices. Other countries including India, South Korea, Taiwan and China are building reserves or plan to start soon.

The post-September 11 chill in relations between Saudi Arabia and the United States has raised concerns that Riyadh may no longer be willing to act as a guarantor of cheap oil as it did during the 1990s.

REFINERY BOTTLENECKS

Environmental regulations are pushing up the price of making fuel, forcing companies to build expensive new facilities and making it harder to ship supplies between regions.

US gasoline demand is up in part because of the growing numbers of low-mileage-per-gallon sports utility vehicles on America's highways. The United States accounts for about 45% of world gasoline consumption.

US gasoline demand drives a growing requirement for high-quality light, low-sulphur crude. China is competing for those grades of oil to meet demand for transportation fuels, lifting the price premium for low sulpur crude. Most of OPEC's crude is heavy and high-sulphur.

"No matter how high OPEC output goes, refiners are still struggling to replenish low product stocks and get enough sweet crude, both factors over which OPEC has little control," said PFC Energy.

In the United States, individual states demand an array of different gasoline blends. This makes it harder to transport supplies between states and to import supplies from abroad.

Environmental regulations have made it more expensive to build new refineries, and much harder to get the necessary permits.

SCARCER OIL

Big oil reservoirs are becoming harder to find and more expensive to develop.

Many of the oil provinces outside OPEC are mature, which means that finds are now smaller, need more costly technology to develop and fall faster from peak production.

Oil companies have also been cautious on spending since the '97-'98 price crash slashed their share prices and triggered a spate of mergers. They have focused on large-scale projects, which will give them good margins.

Many new ventures are in remote areas, which demand expensive equipment and are more susceptible to delays.

Non-OPEC supply growth outside Russia before the price crash averaged more than one million bpd. Since then it has been negligible.

Forecasts of non-OPEC supply growth, especially when the rebound in Russian production is stripped out, have consistently been overstated.

The increased cost of finding and developing non-OPEC oil has fuelled speculatorsconvictions that oil markets are a good long-term bet. Royal Dutch/Shell's reserves troubles have reinforced the view that oil is becoming harder to find.

In OPEC, which holds around two-thirds of the world's oil reserves, many of the bigger nations either do not allow foreign investment in oil, or have unattractive investment and legal terms.

This has slowed down production capacity growth in OPEC nations, meaning that most are already producing flat out to meet demand.

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