I’ll get to the serious stuff in a moment, but allow me to mix in a few pieces of levity.

   The price of gasoline nationwide has dropped to $3.35 gal this morning, but unless you live in the backwoods, you can do better than average in pretty much every corner of the continental U.S.

   For those monitoring the political race, Senator Biden can claim the cheapest statewide price - - $3.18 gal; Senator McCain’s Arizona rides in second place with an average of $3.29 gal; Senator Obama is burdened by a statewide average of $3.50 gal but those red counties in southern Illinois are generally less than $3.00 gal. And if you are one of Governor Palin’s “Joe Sixpack” supporters in Alaska, you can still expect to pay $4.10 gal, doggone it!

  We are headed much much lower in the next 30 days, and indeed there are parts of the country where you may even see unleaded regular in the “four for a dollar” range shortly.

   Those “pray at the pump” protests that were held in June and July have apparently worked. Unfortunately, we may soon have to solicit an ecumenical council to pray for the widows and orphans who have seen the financial malaise trim - - much as a chain saw “trims” - - more than 40% of their savings and wealth.

    But, it could be worse. We could be living in Iceland where three huge banks have collapsed, including one known as “KaupThing,” not to be confused with the 1965 massive blockbuster hit Wild Thing” by the Troggs.  Icelanders are looking at a long winter, where they may be forced to play Icelandic Wheel of Fortune (Are there any K’s?  Yes, there are 16 K’s, but no vowels).

   Here in the U.S., it can’t be as dire as the media coverage suggests. Yesterday, I observed that all of the N.Y. Mets’ luxury suites for the 2009 season had been sold . . and for up to $500,000 per luxury suite!

How We Got Here

   It took some 22 years of crude oil futures trading to realize the first WTI settlement price of over $60 bbl. Consider then, that in the last ninety days, the value of sweet crude has dropped by in excess of $62 bbl.

   I would wager that most of the oil experts interviewed in the first half of 2008 (Oppenheimer’s Fadel Gheit being a notable exception) were seduced by the notion that $150-$200 bbl crude was not far-fetched for 2008. It was, and is, but that doesn’t mean that it’s still not possible to see prices in that range in the first term of the new president.

     An entire generation of young traders doesn’t quite know what to make of this unprecedented tumble. I’ll give it a try.

   Increasingly in the last four years, crude oil futures have become a proxy for global economic growth. Not since 2001-2002 has the U.S. or other developed countries have had any meaningful setback in demand growth for crude and petroleum products.  For the most part, crude’s price has moved from a traditional multiple of the cost-of-production, to a much more abstract reckoning of where prices might head if the world’s appetite for energy remained unchecked.

   Put another way, crude oil and other commodities climbed a wall of worry, and the brick and mortar of that worry was focused on supply. Since midsummer, that wall has crumbled and in a manner of weeks, been replaced by worries related to demand.

   If a price of $147 bbl for July WTI was an abstract peak, what might be the abstract bottom? That is the question that will be pondered in the next 30 days by financial participants, oil traders, and the sovereign governments that control much of the world’s energy output.

   The bottom depends much more on sentiment than fundamentals. Oil—and financial markets –will be much more aligned with the jungle drums of sentiment, headlines, and collateral damage in the next 30 days. The skill set of a psychologist are more valuable than the abilities of engineers, mathematicians, and economic modelers over the near term.

   The world is hardly awash in oil. Significant new fields aren’t about to come on line, and OPEC hypothetically still commands the ability to tilt the balance toward glut or shortage. Refiners do not have the motivation to run any extra feedstock thanks to red ink for sweet crude margins in October. Marketing and trading companies don’t have incentive to hold inventory because of the steep short term borrowing costs that are part of the global credit freeze.

Some Likely Outcomes

   I’ll risk a couple of short term predictions:

   - - Confidence in the U.S. economy probably won’t be restored until after Election Day. No matter who wins the presidency, at least half the country believes that a disastrous new regime is likely to inherit this malaise. There is nothing temperate about American political sentiment these days.

  - - Gasoline prices will have difficulty trading for any reasonable premium over the price of sweet crude. Right now, we have more than 3-million bbls per day of refining capacity on the shelf, but that seems to be enough to handle October and November needs. A price of $80 bbl for crude might translate into a wholesale price of $80 bbl, or $1.90 gal, for gasoline. Add 60cts gal and you have a typical retail price.

  -- Crude oil and gasoline will overreact, and will overreact severely. The oil futures market has transitioned from a relatively tranquil body of water to the Bay of Fundy. The tides have been and will continue to be excessive.

  - - Gasoline retailers are making much more money now than they did when prices raced above $4.00 gal. But it’s a little like losing a World Series game 15-4 in which you score all four runs in the last inning. It’s been a tough year for the entire downstream oil chain, but a grand year for those that take oil or natural gas out of the ground.

  -- We will see the national average dip below $3.00 gal shortly, and we may even threaten that $2.75 gal number that would push hypothetical U.S. daily gasoline expenditures below $1-billion per day (It peaked at about $1.6-billion per diem in July).

   --Northeastern consumers should take a moment and think about locking in some winter heating oil. The available lock-in price was projected to be above $5 gal in June and it has descended to where $3 gal is possible.

  - - Wherever prices bottom - - and I believe that the bottom will come in the next 100 days or so - - one should remember that history suggests this ebb tide will be followed by a violent high tide that will take prices sharply higher again. Every winter, I think of the Spinal Tap hit “Big Bottom”. When measured against any year prior to 2007, we’ll see a “big bottom” for fuel prices, from which prices will rally by 40-70% or more.

   Keep in mind.  More drivers and more cars are coming in to the U.S. economy and they need to use fuel, even if only to drive to the bank withdrawal windows or the unemployment office.