Break dried chilies in half and squeeze out the seeds. Soak in hot water for 30 minutes to soften. Drain.
Blend dried chilies, red chilies, and shallots with ¼ cup (60ml) water until smooth.
Heat vegetable oil in a medium size saucepan over low heat. Add blended chili paste, salt, and sugar. Stir continuously until chili paste darkens and oil separates. This will take about 12 to 15 minutes.
Remove and place in a jar.