Cramer: Oil's Fall Is Econ 101

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Nigerian rebels, Iranian saber-rattling, potential Israel-Iran war, hurricane warnings, Venezuelan meddling, Turkish pipelines, BP (BP) woes in Russia, all of these at one time have allegedly contributed to the strong oil price. Every time we rallied a couple of bucks, the usual suspects were rounded up and given credit for the rally.

And then the biggest actual ruckus of all -- a war between major oil producer Russia and Georgia -- rages on, and oil cascades lower into the escalation. LOWER! If this incursion were to rank with the parade of horribles that allegedly spurred oil from $90 to $148, it would be off the charts. It is the real deal that can interrupt pipelines and cause a calamity in the European market. It should have sent natural gas -- the Europeans live off Russian natural gas -- into the stratosphere, as it should have caused hoarding and a spike even here for recognition that no liquefied natural gas could come here because it would be needed so badly in Europe.

So why didn't it? From the beginning, I have said this is all economics: Supply wasn't able to meet demand. Supply wasn't constant -- it keeps dropping everywhere except Saudi Arabia -- but more important, demand did not slow down until the peak hit; at that point, which produced gasoline well above $4, we stopped using. We slowed driving incredibly. We carpooled, stopped taking excessive trips, turned in the SUVs and wiped out the most popular category of automobiles -- trucks -- overnight. Since Memorial Day, the wholesale shift has made it so the Valeros (VLO) and the Tesoros (TSO) have nowhere to put gasoline and little demand.

In other words, all the canards of terrorism and disruption were no more than canards. The demand destruction, to use the cliché that has taken over the airwaves, was monumental and stopped the oil rally in its tracks.

Sure, there were changes in the margin rules, and the dollar rallied, but the dollar stopped going down a while ago -- during the oil spike, actually -- so that didn't seem to matter much either. It was supply and demand.

That meant those who had made a bet on higher oil prices now had to exit the trade to avoid being wiped out. In other words, profit-taking. Don't believe it? Look at how many people had to exit the stocks. The commodity was even more chockablock with investors who weren't indexing but just getting it right. They are still liquidating and just praying for a couple up days so they can unload.

I don't think they will get more than a smattering.

It's funny, we don't hear "linkage" now, do we? We don't, because there really never was any. We just finally got enough oil in the pipe and finally got to where the buyers went on strike.

That's what happened. Nothing more. They are still on strike. That means they still go lower.

Random musings: Speaking of too much supply, how about the PetroHawk (HK) secondary. Just what the market needed! Ugh. Too bad, because if you go read the Devon (DVN) conference call, it is spewing cash almost as fast as it is spewing oil. It is selling for $16 a share of proven reserves.

At the time of publication, Cramer was long Devon.

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