It's rarely easy to offer a contrarian point of view, particularly when a vital commodity is in such high demand as oil is today, but author John Cassidy attempts to do so in the January 2008 issue of Portfolio magazine, "The Coming Oil Crash."

In it Cassidy walks us through classic cyclical theory, i.e. what happens to a commodity when markets work as they should. Namely, that the recent tripling of oil prices is unleashing forces - - as it did the mid/late 1990s - - that will bring oil's price tumbling down in the next few years to $50 per barrel, perhaps even as low as $30 per barrel. (Oil closed Friday up 32 cents to $96.74 per barrel.)

What are the factors that will prompt the dramatic slide? First, new technology which allows for more oil extraction per zone. Second, a global slowdown that could certainly cause oil prices to drop, and put the brakes on demand. Third, systematic shifts away from oil, due to price: oil's lofty price is encouraging countries to shift some energy requirements permanently to alternative energy sources and to use less oil. Fourth, new oil discoveries, combined with technology, will add large amounts of new oil supplies from such previously unfeasible zones in the Arctic Ocean, Brazil, and the Gulf of Mexico. Fifth, ethanol production in the U.S., although energy intensive, could curb demand for oil. Finally, quick ramp-up alternatives natural gas, nuclear power, and synthetic oil will displace an increasing amount of crude oil, putting further downward pressure on prices.
Cassidy factors-out the effect of traders - - i.e. that speculative long positions which (he asserts) have caused oil's current price to far exceed the costs of producing oil, will disappear, then exert a reverse downward pressure as speculative shorts once a market shift has been sensed; he adds that once sentiment turns, the price fall could be just as dramatic as oil's price rise.

Sheik Yamani's prediction

The author also cites Saudi Arabia Oil Minister Sheik Yamani, who in 1981 predicted, quite presciently, that no one, not OPEC, or Exxon Mobil Corporation (NYSE: XOM), or hedge funds can keep oil at a prohibitively high price. OPEC's production cuts, and in particularly Saudi Arabia's cuts in the 1990s tried to maintain a floor price for oil once the market had turned and demand had waned: they failed, but Sheik Yamani was right. Oil's price crashed below $20, then $15, eventually hitting a low of about $11 in the late 1990s. Gasoline in Washington, D.C. in 1998 fell below 85 cents per gallon.

Oil Analysis: Under the cyclical oil thesis, and using author Kennedy's analysis, a global economic slowdown could put in motion a major break in oil's price. Short-term factors, such as production outages due to accidents or weather, can be ignored because they don't change long-term factors. If the global economy, along with the U.S. economy, slows substantially in 2008, it would seem to create one of the conditions necessary for a market reversal. But if just the U.S. economy slows, cyclical theorists could argue that the global economy didn't slow enough for the price crash to occur.

Conversely, today's oil bulls can argue that "This time it's different" - - an eerie mantra also voiced during the Nasdaq, Internet, and housing bubbles. The bulls argue that whereas previous oil price rises in 1973-74, 1979, and 1990 stemmed from supply crunches, the current elevated price is driven by rising developing world (China, India) demand for oil.

Can that demand maintain a $95 per barrel price for oil? The argument here is that it can't, that the price will cause demand to soften, which suggests, when combined with aforementioned factors, that oil's price is headed for a fall in 2008.