It's all speculation, explained Roger Diwan, Managing Director of Markets and Countries with the Petroleum Finance Company, a Washington-based think tank that follows and analyzes trends in the petrochemical industry.

Speculation brought about by what Diwan calls paper traders. They are the people buying and selling oil -- and not the oil producers themselves -- who are to blame for the escalating costs. The price of crude reached $49.40 in New York on Friday, the highest ever.

These traders never actually touch a drop of oil, other than when they fill up at the pump. Their transactions are carried out on the mercantile exchange floor rooms of New York and Chicago and their repercussions are felt at the pump. They are the primary reason oil prices are soaring, much more so than the question of security and violence in the Middle East.

It's obscene and absurd, says Diwan of these physical traders. The petroleum specialist says that the price hikes are all on paper. Sure there are security-associated additional costs riding on today's barrels, but though it's difficult to pinpoint, Diwan estimates that the security riders are no greater than $5 to $10 per barrel. He blames the maddening rise on hedge funds -- a new phenomenon in the commodity markets.

They buy oil on paper, Diwan explains, hoping to sell later on and make a huge profit. Of course the current geopolitical situation plays into their laps -- or rather into their wallets.

But there might just be some light at the end of the pipeline. Diwan predicts that the price of oil will drop in the near future. But, for that to occur, he says, first you need a triggering event.

The arrest of Shiite maverick cleric Moqtada Sadr, currently engaged in fighting U.S. forces in Iraq, could be that triggering event. Or a ceasefire agreement bringing relief to the Iraqi situation, for example, would encourage the traders to start selling their oil, bringing down prices very quickly.

And then says Diwan, watch the prices drop to $42-$43 per barrel. He does not foresee a return to the $18-$19 per barrel oil stood at just four years ago, when President George W. Bush first entered the White House. Other experts agree that it would be unlikely for the price to go under $40.

But also just as likely is a triggering event that could send prices up even more.

For the moment, the price hovers around the $50 per barrel mark, the highest it has been for a very long time. It's 1979 all over again for the Arabs, says Diwan, referring to the last time the price of oil had reached record highs. Then, the price per barrel had reached $32-$33, according to the U.S. Energy Information Administration.

However, all speculation aside, there are several other factors that come into play pushing the market north of $49 a barrel. Demand is very strong, points out Diwan, adding that current supply is having a hard time keeping up.

China, the new kid on the capitalist consumer block, is learning to guzzle gasoline almost as fast as Americans driving their shiny suburban SUVs. The nouveaux riches in Beijing, Shanghai and other Chinese metropolises have discovered the joys of automobile ownership. Of course, with cars comes the rising demand for oil. Similar scenarios are being played out in India, where the emergence of a new middle class and increased car sales, have resulted in new demands for oil.

Compounded with the rise in demand for oil is the issue of internal problems affecting several oil producing countries. The violence in Iraq plays a major role, explained Diwan.

Iraq, which sits on the world's second-largest oil reserves, is producing at a lower level than before the war. According to some analysts, Iraq is barely pumping out 1.3 million barrels per day when it should be producing about 2.5 million to 3 million bdp. Continuing terrorist attacks by insurgents against pipelines and oil facilities have hampered earlier plans to reach the targeted limit of pre-war levels and initial hopes of surpassing them.

Venezuela's internal electoral strife revolving around the Chavez referendum has frightened the markets, as has the Yukos affair in Russia, which has caused lower production in Russian oil. Recent terrorist attacks in Saudi Arabia have helped further unsettle the market, adding uncertainty regarding the stability of the world's largest oil producer.

And last, but by all means not least, is the saber-rattling taking place between Iran and the United States over the perceived threats that Israel may be considering bombing the Islamic Republic's nuclear facilities. Should that crisis ever expand, watch for prices to soar well over $100 per barrel.

As for stepping up production, members of OPEC, the Organization of Oil Exporting Countries, have almost reached saturation in terms of production capacity. Saudi Arabia, the world's No. 1 producer, is currently churning out 9.5 million bpd. Diwan believes they can maybe step up production another 300,000 or 400,000 bpd at most. Hardly a dent in this ever more demanding market.

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