The demand for petroleum in the world hasn't dropped over fifty percent in the last several months, but the price has. Once over $150 a barrel, oil recently traded under $70.
The price of a barrel of oil at a given moment isn't determined by some economic calculation predicting its downstream economic impact, but by the demand that exists for the last barrel offered for sale. The marginal demand -- that is, the hunger for that last barrel offered for sale -- is what sets prices. Trucking companies are going to deliver food across America regardless what happens on Wall Street. Commuters will get to work, and children will motor to school. Power plants will keep making power, and home heating units will keep heating homes. Most of the demand continues.
However, when drivers are inclined to make fewer (and fewer) discretionary trips, those unburned gallons of fuel begin to dampen demand for petroleum being pumped worldwide at sellers' best possible speed. The American decrease in driving -- over fifty billion fewer miles driven since last year -- mostly impacts gasoline demand (explaining in part, perhaps, why Diesel remains relatively costly). But it definitely impacts what people will bid on yet another barrel of oil offered for sale at a given moment.
The balance of marginal demand against marginal supply is the reason d'être for market-manipulating schemes like the Organization of Petroleum Exporting Countries (OPEC), which tries to keep prices high by limiting production. (The fact that production is limited because of terrorist attacks on production facilities in the Middle East, and incompetent management in Venezuela, and not in fact orders from OPEC bosses -- and that the producers are largely incapable of producing any faster than they presently produce -- is an entertaining observation about the organization's current utility, but says nothing about the reality of producers' ability to manipulate prices if they did agree to limit production.) Artificially manipulating supply to game pricing in the face of a relatively constant demand is attractive if cooperation is available among suppliers.
The reason that markets for goods "work" in the sense of producing "rational" prices is that, in the absence of manipulation, supply and demand check each other: if demand falls enough, the marginal cost of production will make further production a bad bet, and production will fall. Equillibrium is restored not by economic modeling of the intrinsic value of the goods for sale, or predictions about the goods' utility, but by the simple action of supply and demand "responding" to one another through the self-interested business decisions of market participants.
This doesn't mean that markets "work" all the time, though: where manipulation exists on either side of the equation, prices will move to wherever the market plus the manipulation cause marginal transactions to be priced. The ability of vendors of intangible goods on securities markets to "sell" securities without ever delivering them, with no cost of production, ensures manipulative pricing will continue until the law is enforced. The law, of course, is that securities sold in the marketplace must be delivered to the buyers. This, of course, isn't enforced, or lists like this would be very short and would not have the same securities on them month after month. It's not like the exchanges keep these lists secret.
The fact that a slight depression in demand can cause petroleum prices to drop by over half in the space of a few months offers us some insight into the scale of the value destruction potentially at work in marketplaces in which sellers artifially inflate supply by enjoying freedom from any actual requirement to deliver the things they are selling. By mopping up genuine marketplace demand with bogus sales that never result in the delivery of securities, bad-faith sellers who don't own the securities and make no effort to obtain them even by borrowing them can have a significant impact in the markets for some securities.
Securities like Sears Holdings, which last month was short-sold for over 55% of the stock's entire float, remains vastly manipulated with "only" 40% of its float short-sold. Imagine someone added 56.81% to the world supply of collectible automobiles overnight -- production runs of 100 cars now suddenly have 155 specimens on offer, for example. Exactly what, do you imagine, would happen to the price of the next one offered for sale? It's not like the holders of those extra 56.81% of Sears Holdings will ever get to vote -- the company can't count votes for more than 100% of the outstanding shares -- it's hard to see what a buyer of a non-delivered security gets, other than the possibility of becoming the next seller to fail to deliver. It's a fraud.
In the case of OPEC, where supply is (in theory) constrained by cooperation, the supply manipulation is geniune even if it's not the natural behavior for individual market participants (a fact that explains why historically, OPEC members routinely produced over-quota). In the case of naked shorting, it's illusory supply added to a market whose buyers can't know -- because their intermediaries conceal the sellers from the buyers -- that they are being cheated. In the end, it's the market as a whole that is cheated, by destroying the price on which participants are encouraged to rely as the "correct" price for a particular security on a particular day. In the case of a short-oversold stock, it's a price that makes holding look like a loser's game, and drives out investors in favor of a security that displays a more optimistic price.