Oil price increases and volatility have been fueled by a variety of factors, Bala said, including a surge in Asian demand for oil; constraints in refinery capacity; geopolitical issues; an increase in investor and hedge fund interest in oil markets; and a changing product mix.

Growth in Asia and China in particular has been a key factor. China now accounts for about 9 percent of the worlds oil consumption, overtaking Japan as the second largest consumer after the United States. The Asia-Pacific regions demand is around 30 percent of world consumption, nearly doubling its share in the past 25 years. And Chinas demand is projected to grow by 500,000 barrels or more every year, Bala said.

Maturing oil fields and tight refinery capacity pose supply constraints worldwide. Increased refinery capacity is needed, Bala said, but hasnt happened. The issue is refinery shortage, not crude shortage.

Speculative interest in crude has grown much faster than physical demand growth. For example, Bala noted, the NYMEX crude oil combined futures and options open interest has grown 250 percent since 2002, while on the physical side, oil demand growth is only about 1.5 percent per year.

Traditional fundamentals fail to explain the oil price dynamics of recent years, Bala said. There are new drivers now, and oil prices can largely be explained by four factors: global oil inventories, still a valid factor; speculative open interest in the oil market; refining margins, the top variable explaining high prices lately; and the decline in spare OPEC production capacity, a relatively insignificant variable.

Over the past 20 years, Bala noted, global oil consumption growth has averaged around 1.5 percent per year, but in the past three years its been over 2.5 percent, driven mainly by China. In the past three years, Chinas oil demand has risen more than 10 percent per year, and in 2006 China and the Middle East accounted for some 60 percent of the worlds growth in oil demand. And all indications are that that scenario is likely to continue for the foreseeable future.

Lubricant demand is set to grow along with the general increase in energy consumption, reaching 41.7 million metric tons in 2010. Lube demand is forecast to advance 2.3 percent per year, said Bala, compared to just 1.5 percent for oil in general. The Asia-Pacific region will be the fastest growing market, with China leading in overall gains.

Asia suffers from a lack of diversification of oil supply sources, Bala said, with 82 percent of its oil imports coming from the Middle East. This contrasts with the more balanced markets in Europe and the United States. Oil imports to Asia from the Middle East were about 13.5 million barrels per day in 2006, and are expected to grow to 28 million b/d by 2030.

Over-dependence of Asian economies on Middle East crude has led to an Asia oil premium, Bala continued. Low oil stockpiles in East Asia help Middle East suppliers discretion on price, … although there are some initiatives now by Asian countries to negotiate better prices to reduce the premium. And some Asian economies are getting serious about building their own strategic petroleum reserves.

Bala proposed that Asian oil demand will drive the rise of new price markers, to replace WTI as the leading pricing benchmark. The change could come with the launch of a Dubai sour crude futures contract and the Dubai Mercantile Exchanges Oman contract. The Oman contract, Bala said, may become the new global benchmark.

Companies in Asia have reacted to increased oil prices by hedging more, and using more sophisticated instruments. At the sovereign level, many countries – China and India in particular – have been actively scouring the globe to acquire oil fields. Financial hedging through state-owned oil companies has also increased, Bala said.

Finally, said Bala, in Asia as well as in Europe and North America, environmental regulations, emissions controls and use of biofuels will influence oil consumption in coming years.