Record high oil prices are being driven by fears of terrorism and the possibility of political upheaval in oil-rich nations and not by current supply or demand, oil experts said Wednesday.

"We're crazed about the price level, but there's no physical shortage of oil," said Tim Evans, senior analyst at IFR-Pegasus (search). "This is a market dominated by fears."

Oil futures on the New York Mercantile Exchange (search) settled up $1.05 cents to $43.80 a barrel on Friday, after hitting $43.85 at midday, the highest level since the futures contract began trading in 1983. Prices are more than $12 above what they were a year ago even though U.S. stockpiles of oil are now substantially higher.

In London, Brent crude oil rose 78 cents to $40.03 a barrel.

Energy dealers have attributed gains to the possibility of disruptions to oil shipments from key suppliers like Saudi Arabia and Iraq, and more recently Russia — where oil giant Yukos (search) is in the midst of a tax evasion dispute.

Yukos has said the company could collapse by mid-August because of a freeze on its bank accounts and assets, adding that its rail shipments of oil, which make up a quarter of its total sales, could be affected soon. Yukos, whose former CEO Mikhail Khodorkovsky is on trial for tax evasion and fraud, pumps a fifth of Russia's oil.

"I think the market is overdoing it on Yukos," said Bill O'Grady, market analyst at A.G. Edwards. "If a country is looking to aggressively appropriate the assets of a company, that doesn't mean they are going to stop production."

Fears over terrorism and political unrest have long been supporting higher prices for oil, but the fundamental supply and demand situation has been quietly improving, making record energy costs harder and harder to justify.

U.S. oil supplies rose last week by 1.2 million barrels to 300.5 million barrels, bringing them 17.3 million barrels higher than last year, according to the U.S. Department of Energy (search). Crude imports, meanwhile, hit an all-time record of 11.3 million barrels per day.

"This market is hysterical," said Bill Ferer, president of W.H. Reaves & Co. "The uncertainty in the market has overwhelmed the fundamentals, creating a big dislocation."

An analysis of stockpiles and consumption levels alone would dictate a price for oil at least 25 percent cheaper than it currently is, analysts said.

"The reason for the difference is terrorism, terrorism, terrorism," said Evans of IFR-Pegasus. "But the terrorists don't have to do a thing. We've already got oil at $43 and record gasoline prices. We're terrorizing ourselves."

Knocking down the "house of cards" may not be easy, as long as the market holds fast to its fears, Evans said.

"We need four weeks of relative calm, no strikes, no pipeline attacks, to allow the market (players) to take a look at the situation and ask themselves, 'Is it really that bad?"'