Crude oil prices have crossed $78 per barrel for the first time ever as tensions continued to rise in the Middle East. August NYMEX futures hit an all-time high of $78.40 and are now trading at $78.16 per barrel in Asian trades.

The major factor driving oil prices is rising tensions in the Middle East. Israel attacked targets in Lebanon yesterday, including the Beirut international airport, in a drive against Hezbollah militants. More than 50 people have died in Israeli attacks and Hezbollah retaliated by launching rockets into Israeli territory.

Tensions started after an Israeli soldier was kidnapped by Palestinian militants and Israel retaliated by moving into the Gaza strip and attacking positions of the Hamas-led Palestinian government. Many people lost their lives in these attacks.

A few days later Hezbollah attacked an Israeli post, killing three soldiers and capturing another two. Israel maintains that Hezbollah is backed by Iran and Syria and markets are worried that these incidents would worsen to a full blown conflict. A military conflict with Iran and Syria on one side and Israel, backed by the US, on the other would disrupt oil exports from the Middle East.

Yesterday, Russia and China agreed to refer back the Iranian nuclear dispute to the UN Security Council after Iran refused to respond to a proposed peace package before mid-August. Iran is the second biggest oil exporter among OPEC countries and the country has often warned that it would choke oil supplies if any action is taken against it.

To worsen oil supply concerns, militants attacked two oil pipelines in Nigeria and disrupted supplies. It is reported that Nigerian exports has declined more than 1-lakh barrels a day following the attack.

Worse than expected decline in US stocks of crude oil and refined products, as the summer demand is building up, is also helping oil prices. The International Energy Agency (IEA) said demand for oil would outpace supply growth after a medium term decline in 2007.

In India, the government would be forced to consider yet another fuel price hike at the earliest. Such a move would trigger another round of protests and threats from the left parties who insist that the central government should cut duties on petroleum products to avoid a price hike.

Many analysts now doubt the government''s ability to go ahead with a fuel price hike after the embarrassment over suspension of PSU disinvestment following threats from the left parties and allies. The other option is to force PSU oil companies bear the burden and slowly bleed them to near death.