U.S. benchmark crude fell $1.93 to $82.89 per barrel in midday trading in New York. The last time oil closed below $83 was in early October of 2011. Brent crude, which is used to make gasoline in much of the U.S., fell 2 percent to $97.91.
Global economic growth is weakening. Europe remains mired in a debt crisis and growth in the U.S. and China has slowed. That reduces demand for oil to make fuels for shippers and travelers.
Oil prices had risen off recent lows on hopes that Federal Reserve Chairman Ben Bernanke would unveil a plan to stimulate the U.S. economy, which would lower the value of the dollar and provide investors with cheap money to buy oil and other assets.
But Bernanke told Congress Thursday that no plan was imminent. That sent the value of the dollar higher, making oil look more expensive to foreign buyers.
Without the prospect of cheap and abundant dollars, investors were left with simple choice: Whether to buy or sell oil based on world supply and demand. They sold.
Supply has risen faster than demand in recent months. Production in Libya, Iraq and the United States is growing. Saudi Arabia has been pumping more oil to offset supply loses from Iran, which is struggling to export crude under tightening Western sanctions. Meanwhile, global demand for oil is falling with slower economic activity.
Because of those trends, the price of oil has fallen 25 percent from a peak of $109.77 on February 24.
Addison Armstrong, an analyst at Tradition Energy, said that based on supply and demand, there was no reason for oil to cost as much as it did earlier this year. It is now near a price he considers “fair value.”
The fall in oil has brought some relief to U.S. drivers. Retail gasoline prices have fallen steadily since their peak of $3.94 per gallon April 6. The national average fell half a penny to $3.555 Friday, according to the Oil Price Information Service, AAA, and Wright Express.
Oil prices have been pushed higher in recent years because of growing demand from China and other developing nations. But growth in China has been slowing sharply and investors expect the country will soon reveal that growth continued to slacken in May.
“Imports of crude (into China) have fallen, taking the steam out of world crude prices,” said Judith Dwarkin, chief energy economist at ITG Investment Research.
China cut state-set gasoline and diesel prices for the second time in a month on Friday in an effort to reduce costs for drivers and shippers, and reverse a sharp slowdown in the world’s second-largest economy.
Investors interpreted the government price cut as an indication that the slowdown in growth might be even more drastic than anticipated.
In other energy trading, natural gas futures rose 3 cents to $2.30 per thousand cubic feet. Heating oil fell 2 cents to $2.64 per gallon. Wholesale gasoline fell 4 cents to $2.64 per gallon.