Forming new rules of game in the world oil market

Oil prices have hit record highs of US$139.01 a barrel and have more than doubled in less than a year. The soaring cost of oil could help tip some of the world's economies into recession and causing growing strain to economies around the world, with some governments facing protests and other pressures from consumers and businesses.

In addressing the issue, both the Malaysian and Indian governments have recently raised fuel prices in order to cut the subsidies they provide.

India insisted there was no agreement to remove the subsidies altogether, China made clear it had no time frame for moving towards lower subsidies, and Japan confirmed they had agreed only on the need to remove the subsidies.

Crude oil, also known as petroleum, is the world's most actively traded commodity. The largest markets are in London, New York and Singapore. To an increasing extent, financial institutions are trading in oil as an investment like shares or currencies. They buy oil contracts in the hope that their value will go up before they sell them. This would commonly be in a futures contract for delivery in the following month and the minimum purchase is 1,000 barrels.

In this type of transaction, the buyer agrees to take delivery and the seller agrees to provide a fixed amount of oil at a pre-arranged price at a specified location. Futures contracts are only traded on regulated exchanges and payments are settled daily, based on their current value in the market place.

Opec still controls the amount of oil it pumps into the marketplace to keep the basket price within a predetermined range. Producers say that there is plenty of supply and blame the high prices on speculators.

Economists will tell you that prices are set by supply and demand and, indeed, at the heart of the rise in oil prices are what are known as the fundamentals.

Demand for oil has been growing as Asia's powerhouse economies such as China and India fuel their rapid economic expansion. At the same time, there are all sorts of worries about the supply of oil.

A lot of the world's oil comes from somewhat unstable countries, so every time oil workers are attacked in Nigeria or Iraqi oil facilities are damaged, people get concerned about the supply of oil.

Fundamentally, people are worried that demand may be growing faster than supply, and oil is such an important commodity that they are prepared to pay more and more for it if they are worried.

Events such as rocket testing in North Korea have been cited as reasons for the rising price of oil. But it is hard to imagine how it could have any direct effect on its supply or demand.

But recently, many traders have believed that some people are treating oil and the dollar as alternative investments. So, if they think the dollar is falling they will buy oil instead and if they think oil is falling they will buy dollars instead. Investors hedging oil against the weak dollar has also pushed up the price of oil.

Oil prices were given a boost on a report by Morgan Stanley analyst Ole Slorer, who suggested the price of oil could rocket to $150 as early as July, justified the blame the high prices were caused by speculators.

Some analysts even suggested that prices would reach as high as $200 a barrel during the next 18 months. The market was also responding to a statement by Israel's transport minister that an attack on Iran was unavoidable after sanctions to prevent Tehran from developing its nuclear capability had failed.

The fears that workers at Chevron Corporation in Nigeria may go on strike and subsequently disrupt production and access to oil are also adding to market jitters.

Friday's spike in oil prices coincided with a dollar slump, plummeting share prices on Wall Street and US unemployment suffering its biggest rise in 20 years.

Separately, Russian President Dmitry Medvedev blamed what he termed the US's "economic egotism" for the current problems in the global economy.

He accused the US of "aggressive financial policies" and said most people in the world had become poorer. He said Russia was a "global player" and wished to "participate in forming new rules of the game", but not because of "imperial ambitions".