China's economic expansion has given a dramatic boost to world oil demand, drawing in crude and refined products from all around the world. Chinese crude imports are up 40 percent so far this year and show no sign of slowing despite high oil prices and government efforts to calm economic growth.

Chinese oil demand is forecast to grow another 500,000 bpd, or 8 percent next year, as car ownership surges and power generation needs grow. Traders expect China's 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.

Indian consumption is growing fast too. And solid growth in the U.S. 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 passed $40 a barrel, a level that threatens to slow economic growth, the OPEC producer cartel has raised production to the highest in 25 years in an effort to keep prices under control. This has left little spare capacity outside top world 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 realize 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 a buildup of stocks, especially in the United States, during periods of seasonally weak demand.

-POLITICAL TENSIONS IN OIL PRODUCING NATIONS

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 repeatedly 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 percent of Russia's crude, has intensified concerns. The company has warned 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. An August 15 referendum on Venezuelan President Hugo Chavez' rule could again destabilize exports from the country, a big U.S. 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 cost of making fuel, forcing companies to build expensive new facilities and making it harder to ship supplies between regions.

U.S. 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 percent of world gasoline consumption.

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

"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 1 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 fueled speculators' convictions 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 growth in production capacity in OPEC nations, meaning that most are already producing flat out to meet demand.