If economist David H. Wang had predicted earlier this year that oil would fall to $40 per barrel in 2009, "I would have lost my reputation as an economist in standing," he said.

Or, "they would have probably said I was in need of 24-hour observation," he added.

Well, $40-per-barrel oil in 2009 doesn't appear to be that outlandish now. In fact, in the view of one research operation, it looks downright high.

Merrill Lynch said oil may fall below $25 per barrel in 2009 as a global recession takes hold, Bloomberg News reported Thursday, reducing demand for the world's most important commodity.

The dreaded China slowdown

Equally significant, the global recession may further slow China's economy, creating an even larger surplus in key commodities. Further, even though Merrill reiterated its November forecast that oil futures will average $50 per barrel in 2009, Wang said if China's GDP growth, currently in the 6-8% slows to 5% or below, all bets are off regarding commodity prices.

"Today's oil prices assume continued, solid, if not double-digit growth in China," Wang said. "If China's economy slows further, and we start see real year-over-year declines in oil consumption in China, not just cuts in the level of oil consumption growth, oil prices will fall well below $40 and that $25 forecast will come into view."

Oil dipped 44 cents to $46.35 per barrel in Thursday morning trading. Oil has fallen a stunning $100 since hitting a record high of $147.27 per barrel last summer.

History is repeating itself, at least in the oil market.

Once again, a miscalculation by OPEC -- probably motivated by greed or rational self interest carried to its logical (but foolish) extension -- has resulted in almost the same set of market conditions that resulted when OPEC made the same mistake in 1990-1991.

Then, following the Persian Gulf War in 1990, OPEC increased production only grudgingly, in an attempt to hang onto sky-high oil prices of about $55-60 per barrel. (Or about $120 in today's dollars.) The result? A U.S. recession and a consequent collapse in oil demand, and in oil's price: oil first fell below $40, then $30 on its way to trading below $13 per barrel in 1998. Thirteen dollars a barrel in nineteen ninety-eight.

Those who fail to learn from history...

Fast forward to 2007. OPEC has an opportunity to at least slow, if not reverse the steady rise in oil prices, which were then testing $90. However, despite the fact that oil shocks have preceded every U.S. recession since 1972, except the post-September 11, 2001 recession, OPEC does nothing.

In fact, as the price of oil continued to spiral to dizzier and dizzier heights, OPEC meetings served as information dissemination opportunities to blame the rising price on anything but a lack of increased OPEC production: the weak dollar, geopolitical concerns, investors who view oil as a performing asset, and so on. In fact, what OPEC was doing during this phase of the oil cycle was, yet again, testing the limits of the market: i.e., to determine the maximum price the market could bear, in order to maximize revenue for oil-producing nations. Or, in other words, OPEC members were repeating the mistakes of 1990-1991.

A good rule for a forward-thinking executive to observe is never go anywhere -- at least don't walk into any meeting -- without the latest projections or models for the U.S. economy for the year ahead.

How's the U.S. economy likely to perform in the year ahead? Well, here are the summaries of economist David H. Wang's models based on predetermined values for 20 proprietary variables.

Realignment: This forecast assumes a modest $200-400 billion fiscal stimulus, a $70-80 a barrel oil price, record / near-record home mortgage foreclosures, along with efforts to realign U.S. energy policy, and reductions in health care spending accompanying national health care legislation. In this model unemployment rises to 9.5% and the recovery does not begin until Q4 2010. (That's correct: Q4 2010.)

Elongated: This model assumes a modest $200-400 billion fiscal stimulus and a $60 a barrel average oil price, with another year of record / near-record home mortgage foreclosures. Unemployment rises to 9.0%, and the economic recovery does not begin until late Q2 / early Q3 2010.

Steady-state: This model assumes about $500 billion in fiscal stimulus and a $60 a barrel average oil price, among other factors, that limits the recession's depth slightly. Unemployment still rises to 8.0% from the current 6.5%, but the economic recovery begins in early 2010.

With oil moving toward $50 a barrel, it would be fair to assume the OPEC would push to tighten supplies as soon as possible. Some of its members, particularly Venezuela and Iran, say that their national economies are suffering now that oil is well down from summer prices, which ran over $120 for some time.

But, OPEC cannot gets its act together. At its meeting this weekend, plans to cut supplies to increase prices fell off the rails.

According to Reuters, "OPEC on Saturday deferred a decision on a new oil supply cut amid signs that Saudi Arabia and its Gulf allies are demanding tighter adherence to restraints put in place over the past two months."

The fighting within the cartel is remarkably good news for big Western economies, China, and India. Higher oil prices would push regions that are already weak into a deeper recession.

Since oil and gas prices helped slowdown many national economies, it is only fitting that relief could be a keep factor to giving consumers, particularly those in the U.S., a chance to pay their gasoline costs and their mortgages instead of having to pick one or the other.

The OPEC "non-decision" may be the only good economic news this quarter.

Douglas A. McIntyre is an editor at 247wallst.com

You might think that since consumer prices have tumbled by near record percentages that this might lead to lower food prices. But much of that consumer price decline is attributable to lower energy prices -- after all oil peaked at $147 a barrel in July only to fall 63.5% to $53.63 yesterday.

Why won't food prices follow oil down? Many food producers panicked as corn and wheat prices peaked this summer -- locking in long term supply contracts at top prices. For instance, corn, which usually trades at $2 or $3 a bushel, pealed at $8 a bushel in June.

Although prices have since dropped to $3.50 a bushel, some food manufacturers locked in prices for corn and other commodities in the spring and summer, fearing that prices could go even higher. The result is that producers will pass on those higher costs in the form of food prices going up 7% to 9% in 2009.

Oil prices got a boost today from the news of a large interest rate cut in China, which analysts believe should have the result of lifting oil demand for the country.

China is doing all it can to keep its booming economic growth alive. The country announced its largest interest rate cut in 11 years, as the People's Bank of China slashed rates by 1.08 percentage points.

Oil prices, which have been in a virtual free fall since their record high levels over the summer, moved up as high as $52.76 earlier in the session, and are now trading up $1.40 a barrel to $51.75.

The move by China should help the country rebound from the current slowdown it is seeing in economic growth. The massive expansion of the economies in China and India are a major reason why oil prices moved so much higher in the past couple years, and if today's announced cuts have the intended effect of increasing economic activity, then the country should indeed see an increase in its thirst for oil.

There have been almost no bright spots during the U.S. economic downturn -- no investor or typical citizen would trade minor pluses for the credit market and economic conditions the U.S. currently faces -- but at least one area of commerce offers some encouraging news.

The nation's average price for gasoline has dropped below $2 to $1.99 per gallon, according to a survey by motorist group AAA.

Technically, the price dropped 2 cents to $1.989 per gallon, but the macro point is the important fact: gasoline prices have fallen at their fastest rate since 1981-1983, when prices declined after the end of the 1979-80 oil shock caused by the Iranian Revolution, which devastated Iran's oil sector.

During that period, U.S. gasoline prices fell from about $1.50 per gallon to about $1.10, or from about $3.50 per gallon to about $2.40 in current dollars, economist Peter Dawson said.

Hence, the drop in gasoline prices this late summer / fall has been a record-setter in percentage terms. "The price drop has been stunning. We've dropped 50%, from an average price over $4.00 a gallon to under $2.00, and we've done it in less than a year. That's just stunning," Dawson said. "Historically, it's taken a year or longer for prices to retreat after an oil shock, and in the case of the 1979-1980 oil shock, several years."

In his 30 years studying economics first in China, then since 1989 in the United States, economist David H. Wang has seen it all.

Or at least he thought he had seen it all, he said.

Oil: a $100 plunge

"Oil is just about set to total a $100 fall in less than five months, which is unbelievable. It's hard to fathom," Wang said.

But, if oil, which dropped $3.41 to $49.91 early Thursday, falls $2.64 more, it will have recorded the mind-boggling $100 plunge Wang spoke about.

Oil hit a record high of $147.27 per barrel in July on what analysts then largely argued was an inability of global oil supply to keep up with oil demand growth in Asia, stemming from surging emerging market GDP growth.

However, what we now know, with the advantage of hindsight, Wang says, is that the truly ridiculous $147 price for oil this summer was fanned primarily by a liquidity bubble - - in the form of dollars and a low-interest yen deployed to commodities by institutional investors, among other oil market players. Oil demand played a role, Wang added, "but not to the degree that excess liquidity did, chasing a high-return asset [oil]. Likewise with the weak dollar."

As any experienced trader will tell you, the goal is to cut your losses and let your winners ride.

Automated trading and algorithms have removed much of the subjective component from trading, but there are still trading firms and systems that rely on human judgment.

Pride and oil-long positions don't mix

That component can lead to outsized gains but also large losses, the latter being the case if you believed oil had merely corrected from $147 per barrel to the $120 level this summer.

Energy Trader Jim Dietz, fortunately, was not one of those, but there were traders who established positions at $120, held on hoping that the psychologically-important $100 level would provide support (it didn't), then sustained major losses as oil crashed through first $90, then $80, then $70.

Oil, which fell another 64 cents Wednesday at mid-day, is now trading at $53.75. Dietz said all known, short-term oil bulls -- at least the smart ones -- are out of the market.

"The bear market in oil will continue through the spring of next year, at least, and we can now see what the $147 oil price was a leverage-fed bubble," Dietz said. "The dominant issue now is the demand side. We have year-over-year oil and gasoline use declines in the U.S. and if China's consumption flat-lines, we'll fall well below $50 per barrel." Dietz added that he was currently short unleaded gasoline and oil, with monthly contracts.

OPEC, which Tuesday again lowered its 2009 global oil demand forecast (pdf), is still seen cutting production quotas, but at its regularly scheduled meeting on December 17 in Algeria, not at its special meeting November 29 in Cairo.

Still, the compelling question remains whether OPEC members will comply with existing decisions to lower production, let alone new ones, said economist Peter Dawson.

OPEC problem: production 'cheaters'

"OPEC members are getting into a bit of quandary, and it's one we've seen before, cyclically, in the oil market. States know that if they all cut, their action will support prices some," Dawson said. "The problem has been that historically, some members 'cheat' a little and produce over their quota, thinking their small increase will not affect prices that much, and they will reap extra revenue as a result. When several members do this, the price of oil continues to drop, and so does the cartel's effectiveness."

In the past, cheaters have been small OPEC states, such as Iran, Libya and Nigeria, Dawson said. Oil Tuesday fell 37 cents to $54.58 per barrel. Oil has plunged more than 60% since hitting a record high of $147.27 per barrel this summer, as both long-term investors and short-term traders exited long positions in the markets.

With oil prices cut in half and gasoline near (or below) $2 per gallon, is now a good time for the U.S. to end its century-long addiction to oil?

The topic was raised by none other than the 'liberal bastion' of The Wall Street Journal Monday (subscription required0 with energy analysts and policy makers weighing in.

BloggingStocks Monday asked Energy Trader Jim Dietz to evaluate some of the major recommendations discussed.

• Four-day work week: "It's possible, but the best plan would be voluntary, allowing companies to opt in/out and adopt plans that meet their production needs," Dietz said.

• Mandated higher MPG for vehicles: "This is almost certain to be proposed by President-elect Obama, and will likely pass the Congress. It will reduce gasoline and diesel consumption."

• Mandated flex-fuel cars: "Another measure likely to become federal law and it would take pressure off oil consumption."

• Tax credit for fuel-efficient vehicles: "Another oil saver, and it stands a better than 50% chance of being passed by the next Congress."
  

• Federal funds for next-gen vehicle: "This will likely be included in any rescue package for General Motors, Ford, and Chrysler. A next-generation vehicle would be a game-changer, energy wise, but it's years away."

OPEC said it will meet later this month, Bloomberg News reported Thursday, in an extraordinary meeting aimed at propping-up oil prices.

Oil, which traded Thursday afternoon down 66 cents to $55.50 per barrel, has more or less been in free-fall since it became clear about two months ago that both the U.S. and global economies were slowing.

'A veritable sea change in sentiment'

Oil has plunged more than 60% since hitting a record high of $147.27 per barrel this summer, as both long-term investors and short-term traders exited long positions in energy markets. Energy Trader Jim Dietz was one of those short-term longs, who now is decidedly bearish.

"What we have seen is a veritable sea change in sentiment. Less than a year ago there was talk of $175, even $200 oil with spot supply shortages. Now, it's clear $147 oil was a bubble-ish frenzy, and people can't exit their positions fast enough," Dietz said. "There's even talk of an actual decline in global oil consumption in 2009." Dietz added that he is currently short oil, unleaded gasoline, and natural gas, with monthly contracts.

The other major energy commodities also continued their nearly four-month decline Thursday. Heating oil fell 2 cents to $1.81 per gallon, unleaded gasoline declined 3 cents to $1.22 per gallon, and natural gas fell 27 cents to $6.11 per million BTUs.

There have been few bright spots as the United States attempts to battle back from almost a decade of policy errors, but one positive trend continued Thursday: the trade deficit continues to decline.

The U.S trade deficit narrowed in September to $56.5 billion -- its smallest total in almost a year -- as the plunge in oil prices decreased the nation's bill for imported oil, the U.S. Commerce Department announced Thursday. Economists surveyed by Bloomberg News had expected the September trade deficit to total $57.0 billion. The trade deficit totaled $59.1 billion in August.

Imports fell a record $12.5 billion to $211.9 billion in September, while exports declined a record $9.9 billion to $155.4 billion. Further, during the past year, the real trade deficit has declined 19.7%, with real imports declining 6% and real exports dipping 2.3%.

Economist Peter Dawson said the major factor in the continued reduction in the U.S. trade gap is the plunge in oil prices, but U.S. consumer behavior also is playing a role.

In a new report today, the International Energy Agency warned that an insufficient amount of investment into oil supply is going to result in a serious supply shortage that could make the recent record high oil prices look weak in comparison.

Oil prices spiked to a record high $147 a barrel earlier this summer, but have since been in a pretty steady downward spiral, and were down again today, as the credit crunch and recession fears have created fear among oil investors that oil demand is going to erode over the months to come.

Prices were off sharply again today, and in afternoon trading oil was down another $3.17 a barrel to $56.16, off 5.3% on the day, as the U.S. government lowered its forecast for oil next year to $63.50, down from its previous estimate of $112 that it maintained back in October.

There's modest good news on the gasoline front for U.S. consumers, but don't write (or e-mail or text message) home just yet.

Several key oil-producing nations are preparing for the prospect of $45 per barrel oil, indicating these oil exporters believe the price of the world's most important commodity is likely to fall more amid both U.S. and global economic recessions.

Saudis prep for oil's slide

Saudi Arabia, which possesses the largest proved oil reserves in the world, has passed a government budget that's prepared for $45 oil, stratfor.com reports. Meanwhile, Nigeria and Libya have reduced their 2009 oil price forecasts to $45.

Oil, which has plummeted more than 60% since hitting a record high of $147.27 this summer, fell another 48 cents to $58.85 per barrel in Wednesday morning trading.

Economist Richard Felson said the oil price plunge and the gasoline price drop it has created is good news for U.S. motorists, with certain qualifiers. "It is an astounding drop, approaching a $100 per barrel drop, and that has taken pressure off refined energy products," Felson said. "The problem is, if analysts are correct about $40-45 per barrel oil, it implies a slowdown in U.S. and global GDP that will likely mean large layoffs, which isn't good for anyone."