The astounding meltdown on Wall Street from credit woes associated with the burst of the housing bubble is widely blamed for the swoon in the global economy. But I wonder. As an alternative theory, I suggest that the huge transfer of wealth which has occurred in recent years from rising oil prices has played a major role. The average price of crude since January 2005 is $35 per barrel (in 2007$) higher than the price during the first five years of the century. We’re burning more than 70 million barrels every day. According to my math, that’s more than $4 trillion in additional money that has been transferred from oil consumers to oil producers in the last 56 months. Seems like more than enough dough to cause serious economic dislocations. The breakdown of regulation in U.S. credit markets and the inevitable chaos when the housing bubble popped didn’t help, of course. But the losses attributed to risky mortgages pales in comparison to the trillions of dollars lost to oil producers. The Bush administration appears to think that less than $1 trillion will turn Wall Street around, much of which may eventually return to taxpayers. The global economy is in bad shape. Oil markets are now scrambling to establish a price that reflects the expected decline in oil consumption. In the last two months, NYMEX crude oil prices plummeted from a high of $145/bbl to below $100/bbl, a drop of over 30 percent. Despite the ravages of Hurricanes Gustav and Ike on U.S. production and low crude oil storage levels, prices continued in free-fall. OPEC is considering a reduction in production to support prices. U.S. oil consumption dropped 2.2 percent in the last 12 months compared to a year earlier. Faced with higher prices and bleaker economic conditions, American consumers have managed to curb their oil appetites. There is much more going on, however. Despite the U.S. financial chaos, the billions of dollars foisted on taxpayers for bailouts, and record fiscal and trade deficits, the dollar surprisingly gained 11 percent against the euro in the last two months before weakening somewhat, the sharpest increase since the euro was invented. Evidently, the world still considers the dollar a safe harbor in which to weather the storm, although the near meltdown on Wall Street may erode this belief. While markets and economies gyrate, at least one indicator has remained steady. Crude oil production world-wide has remained nearly unchanged for more than three years. Oil prices rose to keep consumption in line with limited production, but the additional burden of higher prices on global economies took its toll. Prices fell as fears of a global slowdown and lower demand for oil grew. Establishing an equilibrium oil price that reflects stagnant supplies would be difficult enough without the additional complication of economic chaos in world credit markets. On the bright side for consumers, U.S. natural gas prices have also fallen dramatically. NYMEX prices today are about half of what they were only two months ago. Some of this decline is associated with the fall in oil prices?natural gas and oil prices continue stubbornly to move together, despite the dearth of any rationale. Some of the gas price decline is also related to the fact that supplies should be more than ample for the coming winter heating season. Storage levels are about average for this time of year, albeit a bit below last year’s levels. Even with the damage caused by Hurricane Ike, storage is now above 3 trillion cubic feet, a level considered adequate. Some of the decline in the price of natural gas is also a response to the fact that U.S. production increased significantly in the last year. Production is up more than one trillion cubic feet (+5 percent) thanks to high prices and active drilling. However, U.S. consumption of natural gas has increased by the same amount, due largely to the increase in gas-fired electric generation despite high gas prices which persisted throughout most of the year. Ample U.S. gas production has clobbered importers of liquefied natural gas, with recent import levels only one-third of peak receipts last year. The recent fall in gas prices can only exacerbate this trend, as cargoes increasingly are diverted to Europe and Asia where prices are higher. I’m cynical enough to believe that the much-ballyhooed efforts of a certain Texan to increase the use of natural gas as a vehicle fuel are not unrelated to the woes of the liquefied natural gas industry. California’s Proposition 10, placed on the November ballot with his support, would cost the state in excess of $2.5 billion to increase demand for gas. Go figure. So what does the cloudy crystal ball show us about the energy future? That the most important indicator continues to be global crude oil production levels. Other things being equal, I would expect stagnant supplies to continue to drive oil markets. But other things are not equal, as the chaos on Wall Street demonstrates. A global economic meltdown may be avoided, but no one is predicting that good times will soon roll. A weakened economy may not need more oil, in which case prices could continue falling until OPEC curtails production. Faites vos jeux.