OPEC President Chakib Khelil, of Algeria, gestures during an OPEC meeting in Oran, western Algeria, Monday Dec. 15, 2008.

Back in June, I wrote a piece for The American in which I argued that oil prices were being driven higher by the immutable law of supply and demand. Today, with prices plunging to near $40 instead of the $145 level seen in mid-July, it’s abundantly obvious that speculators were a key driver, probably the main driver, of the surge in oil prices that occurred between late 2007 and July.

So, to be clear, I was wrong. The leaders of OPEC were right. So, too, was my pal, Ed Wallace. In May, Wallace, a savvy journalist from Fort Worth who writes for the Fort Worth Star-Telegram and Business Week, published several articles which he showed how the unregulated futures market was being used by speculators to push prices upward.

Of course, it’s not politically correct to give OPEC credit for anything. But last summer, the leaders of OPEC were united in their pronouncements that there was no reason for oil prices to be as high as they were. Their claims were met with widespread scoffing. The response from the International Energy Agency, as well as some of the biggest oil companies in the world – BP, Repsol, and Shell among them – was that the high prices were being caused by supply and demand. On June 30, during the World Petroleum Congress in Madrid, BP chief Tony Hayward, when asked why oil prices were shooting upward, replied, “It’s about fundamentals. Demand is outstripping new supply.” He went on, saying that “`Investors’ is a better word than ‘speculators.’ They believe price will go up based on fundamentals of demand and supply.”

His comments were quickly echoed by Antonio Brufau of Spain’s biggest oil company, Repsol YPF, who said “The fundamentals in the market are the reason for the increase in prices -- the geopolitical risk, the inability to replace production…”

The next day, during a press conference, Chalib Khelil, the president of OPEC, was asked the same question. Without hesitating, he replied “Most of the price pressure comes from speculation.” Khelil explained that the producers were not short of oil and that they had cargoes ready to ship to any willing buyer.

Oil prices have fallen to less than one-third the levels seen in July and the world has shifted away from worries about peak oil and shortages to concerns about oil surpluses that could last for years. That makes what I wrote back in June -- “the easiest explanation for higher prices may be as simple as this: there are too many buyers in a market that has insufficient spare production capacity” – look, rather, well, dumb.

One of the key speculators responsible for this summer’s price rise was Tulsa-based SemGroup, a midstream company that began to trade big positions in the crude market. Recall that oil futures prices peaked on July 14 at $145.16 per barrel. On July 15, SemGroup was forced to liquidate a huge number of oil futures contracts at an enormous loss. On July 22, SemGroup filed for bankruptcy. And prices for both oil and natural gas have been on a steady decline ever since.

Perhaps more important than the current price is the bearish sentiment in the market which seems to indicate that oil and natural gas prices will go lower still and stay there for months, or even years, to come. That could have disastrous effects for the domestic oil and gas industry, which has seen record levels of drilling activity in recent years. But with the collapse in oil and gas prices, that drilling boom has clearly ended.

The number of U.S. rigs drilling for gas usually outnumber those looking for oil by about 3 to 1. But over the past few years, the industry has had incredible success finding new gas deposits. And that will mean a drastic slowdown in domestic drilling activity. Some forecasters are now predicting that up to 1,000 rigs will be idled over the coming months.

Of course, the oil and gas industry has always been one of boom and bust. For a few decades, the Texas Railroad Commission was effective at keeping prices fairly flat. It was succeeded, of course, by OPEC, which, for a time, showed some muscle in maintaining oil prices. But in the mid-1980s, OPEC failed to keep prices from collapsing. That same scenario appears to be happening again. OPEC’s unity as a cartel has devolved into an assemblage of petrostates whose interests only coincide when prices are going up. For evidence of that, witness the November 29 OPEC meeting in Cairo where Saudi Arabia made it clear that it would not cut its production until it saw concrete evidence that the oil price hawks – mainly Iran and Venezuela – provided evidence that they were cutting output as well. OPEC’s inability to agree on production cuts in Cairo has provided yet more ammunition for the bears.

On Tuesday, during their meeting in Algeria, OPEC said it will cut production by 2 million barrels per day, or about 2.5 percent of global production. That news was greeted with a yawn. Indeed, oil prices fell by about $0.50 in the hours after the cartel’s announcement. That lack of a price response reflects an uncomfortable bit of reality for the petrostates: when oil prices are rising, analysts marvel at the power of OPEC and politicos of all stripes go out of their way to bash the organization. Remember it was just last May that the U.S. House passed a bill that could have authorized the Justice Department to sue OPEC. But when prices are falling, OPEC has little cohesion and its ability to move prices upward are limited.

Given the deepening recession, the collapse in oil and natural gas prices provides welcome news for consumers. But for the long-term health of the U.S. – which claims to be worried about its reliance on foreign oil – the price collapse is a double-edged sword, a sword that could leave the U.S. even more reliant on foreign oil when prices finally recover. And oil and natural gas prices will recover. Just don’t ask me to tell you when that will happen. Or why.