The demand is there. People have been calling for a remake since they showed the tech demo at E3... They already have the storyline, characters, etc fleshed out so that part of the dev process would be very quick/done immediately. Plus, their "White Engine" is complete. It's basically free money for them!

Why do you think they aren't remaking FF VII?

there's still V and VI before VII. I pray they'll remake those first.

Because, contrary to what most people believe, it would not be a sales monster. It would sell good, surely, but not FF7-levels.

Basically, I don't think Square see the point in doing a full-fledged HD remake of FF7 when they can just as easily make a new FF-game instead and net greater sales in doing so. If FF7 were to get a HD remake, I'd probably assume somewhere around 4-5 million ... With a new FF game, 5 million is pretty much the lowest possible number it could get.

They are scared of the huge profit they would gain from it,they would simply get so much power,they would go insane...
You are shy SE...but do not fear...you will need the powa,and then you shall release a console...a new console...that shall crush everything besides Sony...and then at the end of the generation...when Microsoft and Nintendo are dead...SE and Sony shall emerge...and become Sony-Enix.
The world shall end...

Actually there is a chance it would sell much more and Square Enix knows that. That is why there has been Advent Children, Dirge of Cerberus, and the PSP prequel.

The problem in the end is pride. Before Hironobu Sakaguchi left he ran almost every project within Square. After Final Fantasy Spirits Within, Square lost so much money they sent him on his way. However, his influence was so pervasive within the Final Fantasy franchise that Square Enix was forced to continue many of his past games and franchises by only skimming around the edges, but at the same time refuse to outright accept them. Square has realized this and so released Final Fantasy 7 spinoffs and games like Kingdom Hearts and Dissidia which features past Final Fantasy characters.  

In a sense this is one of those developer/publisher battles on who is more vital to the company. As of now Square Enix is still in the post-Sakaguchi era in which they are still having trouble deciding where to take the company (their fiscal reports have not been all that positive). To remake Final Fantasy 7 which is considered Sakaguchi's best game by many would mean Square Enix has admitted defeat.

Since Sakaguchi left, Square Enix best achievement has been Final Fantasy X, but even Tidus and Yuna was overshadowed by Cloud and Sephiroth.

Of course this is just my opinion and no one has to go along with it.

as they need to remake FF5 & FF6 first

they are going in order

Thing is, I don't think all of these surroundings to FF7 (except maybe Advent Children) have been as profitable as they may have hoped. Profitable? Absolutely. But when a game is directly tied to FF7 like Crisis Core is and sells just above 2 million, it sounds like FF7 may not be as big of a deal now as it once was. As I said, an FF7-remake would without a doubt be a success, but why spend the effort when they can make a new FF instead and get more cash by doing so? I think it's perfectly logical for them not to be remaking it.

FF3 and 4 got remakes on the DS, but let's be honest, these aren't anywhere near the budget (hell, probably not even a tenth) of an undertaking like an HD remake of FF7. And they know this.

Crisis Core sold *only* 2 million because it's on PSP, where piracy is insane. Development budget of FF VII remake would undoubtedly be much, much lower than a completely new FF, and dev time would be quicker as well (take out concept art stage, character bios, level design, battle system, etc since they're already done). Basically, the only things that would have to be reworked would be the music (which has already been composed for the most part in Advent Children), tweaked menus and polished battle system, and the overall graphics.

I don't understand it either, with the story line written, word for word in plenty of languages it shouldn't take longer than a year to make

That doesn't really help though, because no matter how many people played the game, Square only profit from the ones who paid for it. Piracy is not an excuse - I'm sure a lot of people downloaded the game, but many of those probably wouldn't have bought the game to begin with. I'm a pirate (though not really when it comes to games), and if I got blocked off from downloading something I probably wouldn't get it anyway, because I only downloaded it because I wasn't willing to pay for it.

Putting that aside, you know graphics are what cost, right? Concept Art, Story Design and all that already being done really doesn't change much at all. The graphics are what costs, especially since it's HD which ramps up the costs greatly. Development budget of a FFVII remake would be near identical to that of a regular FF-game, most likely.