TURKMENISTAN - Political Instability.

Bush administration officials and US military commanders have predicted that the violence in Iraq will be particularly high in the period before the American elections and up to or beyond elections planned for the Iraqis by Jan. 31. If the violence escalates and coincides with a severe winter, then the $60/b scenario would become a reality.

Either way, the hedge funds will be playing the key role in the coming weeks and months. The fear premium or the security penalty (where oil exporters are concerned) is the one short-term phenomenon which will make the difference in the foreseeable future.

Strong Demand: The world's consumption of oil is at its highest since 1978 and is projected to soar by a billion barrels this year from 2003. The US, China and India are feeding a seemingly insatiable appetite for fuel, with which the world's oil suppliers can barely keep pace.

Yet even if front-month WTI hits $60/b, world crude oil prices are still below the peak reached in 1981, when the average price adjusted for inflation and in today's US dollars was around $80/b.

High oil prices have not stoked a sharp rise in inflation, largely because modern economies rely less on oil than they did in the 1970s. But that does not mean the world is immune to high oil prices: A growing chorus of finance ministers is warning that global growth will be at risk if oil prices remain at current levels much longer, let alone if they rise by a further 20%.

On Oct. 1, Ali Rodriguez Araque, the head of Petroleos de Venezuela (PDVSA), was quoted as saying "distortions" between transactions placed in the physical market and deals made on the futures market were preventing prices from falling. He added: "There is an extremely high level of speculation in the futures market, primarily on the NYMEX. Until we resolve this problem... we are going to have these distorting factors going forward".

Rodriguez also attributed the price rises to the "vigorous" growth of the world economy and highlighted the role played by China and India in boosting world demand for oil. He said uncertainties in the US, including those related to the presidential elections, were additional factors keeping prices high.