(Xinhua)
Updated: 2008-01-03 20:06

The weak dollar's leading role in oil's ascent to record highs is partly due to a tide of financial flows into commodity investments but also reflects a shift in the greenback's relationship with crude, according to analysts.

The dollar index, which tracks the value of the greenback against a basket of other major currencies, fell more than 8 percent in 2007. A sliding dollar makes oil cheaper for buyers holding other currencies. These buyers are likely to increase demand and bid up oil prices.

OPEC, source of more than a third of the world's oil, chose to keep supply steady at a meeting in December, rather than lift output to dampen prices as consumer nations had been urging.

US crude inventory always plays a big role in oil prices. The US Energy Information Agency (EIA) reported last Thursday that the nation's crude inventories fell to 293.6 million barrels in the week ending December 21, the lowest in nearly three years. US crude inventories had fallen more than 20 million barrels since the week ended on November 9.

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EIA also reported total US commercial petroleum stocks -- including crude oil, motor gasoline and heating oil -- dropped for the sixth week to 981.9 million barrels in the week ending December 21. The current commercial stocks can support about one and a half months of US petroleum consumption, "a quite low level," said James Williams, an economist at WTRG Economics, an energy research firm.

The United States is the world's largest crude-oil consumer, accounting for nearly a quarter of the world's production. The US Strategic Petroleum Reserves were at 695.5 million barrels, or more than one month of US consumption.

Market analysts said other factors contributing to 100-dollar oil include natural disasters, speculation, the inability to immediately produce much more oil in the OPEC countries and a lack of refining capacity.

HIGH OIL PRICES TO HURT WORLD ECONOMY

Oil's climb to the psychologically key triple-digit price sent stocks tumbling on Wall Street and darkened an already gloomy economic outlook in the United States, battered by a housing crisis and credit crunch.

Some analysts believed that the soaring oil prices have a knock-on effect on the whole economy -- from a commercial side, the production costs of electricity rise, which raises manufacturing costs. From a consumer side, the price of petrol for cars and other vehicles rises, leading to reduced consumer confidence and spending.

According to a Wall Street Journal report, oil prices will have a severe negative impact on the world economy if they remain high for a relatively longer period.

High oil prices will have a much more serious impact on emerging economies than developed countries, the report said, adding many countries have raised or will raise the retail prices of fuel oil, which will help alleviate the financial burden of these countries and restrain oil consumption.

On the other hand, an oil price hike will increase the burden of both businesses and households and the risk of inflation as well.

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