Free markets are essential and they have many benefits, but they are not perfect. Many economists, including economist Peter Dawson, agree. The global financial crisis, along with those infamous, Frankenstein-like, mortgage-backed securities and the massive, publicly-funded bailouts for failed free market institutions demonstrate this.

Another example, according to Dawson: the free market and oil. The mantra is, it's best to let the market determine the price of oil. Economist Dawson is doubtful, because oil price swings create economic havoc.

Consider the predicament airline, delivery, and related executives who manage businesses that have a major fuel cost face: you know that this year the price of oil is going to be somewhere between . . . $30 and $110. "Now that clarifies things," Dawson laughs. "Piece of cake."

Also, consider what oil industry executives face: try making and managing a 5-year or 10-year exploration budget. What's the price of oil going to be in three years? $20? $50? $75? $150? "Nobody knows, and it's creating havoc in exploration circles," Dawson said.

This oil trade takes the cake.

At the zenith of the speculative bubble in the oil patch -- when crude hit $147 per barrel in July -- you had everyone from T. Boone Pickens to Prince Alaweed touting $200-per-barrel oil by the end of the year.

Crude is now trading around $40 -- down $107 per barrel in less than six months. Unbelievable!

And this latest drop comes after OPEC voted to cut daily production by an eye-popping 4.2 billion barrels per day.

Looks like the world is awash in crude oil.

Needless to say, those euphoric longs in the oil stocks got destroyed. Most energy stocks lost 50% to 70% of their value during the course of the sell-off in crude.

And remember those television commercials with T. Boone and Chesapeake Energy (NYSE: CHK) CEO Aubrey McClendon pushing for the expansion of natural gas?

Well, natural gas prices are down 60% from their mid-year highs.

If you put money into T. Boone's Clean Energy Fuels Corp. (NASDAQ: CLNE) as recently as September, when the stock was trading at $20, you now own Mr. Pickens' vision for $5.

Economist David H. Wang, who grew up in China but moved permanently to the United States in 1989 for graduate study, is a fan of both traditional Chinese and contemporary American cuisine. And among his favorite American entrees is the classic porterhouse steak dinner.

On Tuesday Wang spent part of the day reading the restaurant reviews of some of New York's world-class steak houses. (We won't list the restaurants' names in this space: they would represent free plugs, and each has a business strong enough to pay for an advertisement.)

Almost reservation time

Wang reviewed the steakhouses' menus because he is likely to win a wager with yours truly, involving the price of oil. I argued that the price of oil would never drop below $40 per barrel again. Wang argued it would, and would also remain below $80. The wager calls for the loser to buy the winner a dinner in every year the price of oil drops below $40 or rises above $80.

Now back in May the wager looked like an 'easy win' for me: oil was sitting pretty, with a price above $110 and arcing ever higher. It looked like economist Wang would be buying dinners for many years in a row.

The fact that gasoline prices have risen, then fallen, is nothing new, so says energy trader Jim Dietz.

Gasoline prices have risen and fallen - - or exhibited cyclicality, in traderspeak - - for decades.

Consider:

• 1973-74 Arab oil embargo: Oil Shock I - - U.S. gasoline prices double from about 35 cents per gallon to about 60 cents per gallon. (Or from $1.50 to $2.50 per gallon in today's dollars.) U.S. recession ensues. Over the next six years prices decline to about $1.80 in today's dollars.

• 1979-80 Iranian Revolution: Oil Shock II - - U.S. gasoline prices double from about 70 cents per gallon to $1.45. (Or from about $2.00 to $3.50 in today's dollars. U.S. recession ensues. Over the next 10 years prices decline to about $1.60 in today's dollars.

What is new about this cycle, Oil Shock III, is the speed of gasoline's price plunge: never have gasoline prices plummeted so much, so quickly, Dietz said.

"After rising to what had been historically high levels of about $2.50 per gallon in 2006, prices rocketed up to ridiculous levels above $4 per gallon this summer in what we now know was a speculative bubble, a lot of it fed by leverage-amplified hedge and investment funds," Dietz said. "They distorted the market, no question."

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.

The winds of change are swirling around us.

In politics, the United States will elect either its first African-American as President of the United States,or its first woman as Vice President of the United States in November.

In baseball, the Tampa Bay Rays are poised to make the play-offs and contend for the American League pennant. (The Tampa Bay Rays!?) And the New York Yankees most likely won't.

And in the oil market, oil is set to test the psychologically-important $100 level, only this time via a downtrend.

That's right, you read correctly: an oil price downtrend. Oil's slide continued Wednesday as initial reports indicated only minimal damage to oil rigs and refinery infrastructure in the Gulf of Mexico from Hurricane Gustav, Bloomberg News reported Wednesday.

Oil fell $2.10 to $107.61 per barrel Wednesday at mid-day. Oil hit a record high of $147.27 per barrel on July 11, 2008. The other major energy commodities also fell Wednesday. Unleaded gasoline dropped 5 cents to $2.68 per gallon, heating oil declined about 4cents to $3.02 per gallon, and natural gas sank 21 cents to $7.05 per million BTUs.

Energy Trader Jim Dietz said the operative phrase in the energy markets now is not 'hurricane' but changing economic winds -- the global economic slowdown. "Each week I review individual country GDP reports to cross-reference institutional data on economic conditions, and they point to one thing, a global slowdown," Dietz said. "If developing world oil consumption growth slows, oil will continue to trend lower, and we'll test $100 in week or less." Dietz added that he was currently short unleaded gasoline and oil, with monthly contracts.

For those of you who own blue-chip stocks, this is an eye-opening prediction. An article at CNBC.com talks about the possibility of Dow 10,000. Dow 10,000!

I repeated that in case you didn't get it the first time. It sounds pretty scary to me, and it should sound pretty scary to a lot of you out there. I'd have to presume that most investors don't use the stock market primarily as a substitute casino for the times when Las Vegas is out of reach. Many of you out there must own a Disney (NYSE: DIS) or a Coca-Cola (NYSE: KO), maybe a General Electric (NYSE: GE) or a Microsoft (NASDAQ: MSFT), something generally considered core and safe for the long-term. I happen to own the first three. Anyone who does is in for some huge volatility if Dow 10,000 comes along.

Actually, whether it comes along or not, volatility is here to stay. And here's the thing about the Dow 10,000 prediction: it isn't so farfetched on a mathematical basis. When you first read that number, you say to yourself "No way, that would be like a depression!" But because the numbers are getting higher, the actual point moves aren't as dramatic as they may seem on the surface. If we hit 10,000, that would represent a decline of approximately 29% from the high reached back in October 2007. As I write this, the Dow is about 20% off the high. Is another 9% feasible?