Price of oil drops to $56 a barrel

Oil prices fell to $56 a barrel Wednesday as awful numbers from retailers and a dismal outlook from automakers lent yet more evidence that the United States and the rest of the globe will slash its energy use.

The Energy Department said it expects U.S. consumption of petroleum to drop more severely than any time since 1980 next year, with gasoline use dropping by another 3 percent. Its Energy Information Administration on Wednesday said 2009 petroleum consumption is projected to sink by a further 250,000 barrels per day, or 1.3 percent, more twice that projected in its previous outlook.

Also on Wednesday, the International Energy Agency (IEA) said more than a trillion dollars in annual investments to find new fossil fuels will be needed for the next two decades to avoid an energy crisis that could choke the global economy.

Light, sweet crude for December delivery fell nearly 6 percent, or $3.50, to settle at $56.16 a barrel on the New York Mercantile Exchange, the lowest closing price since January 2007.

Oil prices have plunged more than 60 percent in four months from record highs near $150 in July.

"We're seeing a massive readjustment on a historic scale," said Phil Flynn, an analyst at Alaron Trading. "We've never gone through anything quite like this."

Investors have brushed off two recent production cuts by the Organization of the Petroleum Exporting Countries (OPEC), and prices have continued to fall amid talk of a third quota output reduction next month.

"The market has become so demand-focused that obvious support mechanisms, like OPEC cutting supply, don't have the same impact," said Mark Pervan, senior commodity strategist with ANZ Bank in Melbourne. He expects prices to fall to $45 a barrel during the first quarter of next year.

Flynn said he expects the oil market will find a bottom somewhere around $50 a barrel. "At some point, prices will go back up, but the big question is when, and that's when the economy bounces back," he said.