Instead of scaring everyone half to death about how terrible the economy looks, Treasury Secretary Paulson and the chairman of the Federal Reserve, Ben Bernanke, could have done something really useful — like talk down the price of oil. Given that Chinese demand is drooping like a wilted flower and that American consumption is also below trend, it would not have been difficult.

For example, last week they might have pointed out that commodities traders, as opposed to oil companies, are dominating the play. How do we know?

For starters, Mike Rothman of International Strategy & Investment Group points out that energy futures trading last week was running at an all-time high of more than 13 times world oil demand. Thirteen times! That’s in comparison to the old rule of thumb that “daily trading volume in a matured commodity market would be three times world demand.” He says the growth in trading volume raises questions about the amount of leverage being applied to commodities positions. No kidding.

Speculators have been buying oil, according to an independent energy trader, Eric Bolling, based not on supply and demand but on tensions in the Middle East — not just Turkey, but also Iran and Iraq. “In 22 years of trading, I have never seen such a geopolitical premium on the price of oil,” he says. Mr. Bolling is now short oil, because he thinks the price has gotten way ahead of itself.

Let’s look at the source of much of the bull case for oil — namely, demand growth from China. The reality, as opposed to the hype, is downright startling. The research team at ISI has examined data from the International Energy Agency and U.S. Customs, and concluded that China’s oil consumption is growing much more slowly than expected. The country is experiencing a substantial increase in oil efficiency, so that despite GDP growth this year above 11%, oil demand has only increased at a rate of 3.5% through the first three quarters.

The IEA has revised downward its estimate of China’s oil demand growth to 4%, reinforcing ISI’s discovery. Keep in mind that the consensus expectation has been for China to up its consumption of oil by at least 7%–8%, a projection that has led to predictions of $100 oil.

In sharp contrast to some of the most excited headlines about China’s growing gasoline imports, the ISI Group points out that “China remains a net exporter of gasoline, and that figure is larger for 2007 than 2006.” (They point out that the country does import fuel oil.)

The Department of Energy data released mid-week disclosed a significant slowing in oil demand in America. For the four weeks ending October 12, American oil demand was up only 0.2% — or roughly flat. Mr. Rothman says that compares to a consensus view that demand in America would be up 1.6%. At the same time, last week’s numbers showed a greater-than-expected increase in crude oil inventories and in gasoline and distillate supplies.

American demand and inventory numbers are especially surprising considering that an expected shift to natural gas use has not taken place. With natural gas prices lagging behind oil, consumers are expected to switch, further reducing the demand for oil. Further softening the outlook for oil consumption is the continued growth in ethanol production, which is now up 30% from the start of the year, to more than 6.9 billion gallons a year.

So how is this slowdown impacting the call on OPEC oil? According to ISI data, tanker rates, which it views as a proxy for oil shipments, have actually trended down of late and are currently running below last year’s level, and considerably beneath the average of the past five years. Though this downtrend might reflect growth in the tanker fleet, the IEA points out that net additions to capacity have of late plateaued.

These trends suggest that OPEC leaders will move at long last to lower prices. The ISI group thinks that at the next OPEC summit meeting, scheduled for November 17, there is a possibility that the organization will move to release extra production to the market. According to Reuters, PetroLogistics is reporting that OPEC is already raising output ahead of its November meeting.

OPEC leaders remember, even if Wall Street traders do not, that high prices do indeed depress demand. They know that the run-up in recent months could well contribute to an economic slowdown that could cause Americans to cut back consumption. It’s happened before, with disastrous consequences to OPEC income, and it could happen again. “There’s no question that current prices are impacting demand,” Mr. Rothman says.

So much for $100 oil.

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