09/14/2011 03:43 EDT | Updated 01/12/2012 02:18 EST

Oil tumbles below $89 as government says consumers cut spending in August

NEW YORK, N.Y. - Oil prices dropped below US$89 per barrel again Wednesday as the latest government data showed Americans holding tighter to their wallets.

Americans spent less on autos, clothing and furniture last month, according to a report from the Commerce Department. Consumer spending is a huge driver for the U.S. economy, and while more is being spent on gas because of higher prices, demand is actually falling.

Commerce reported that retail sales were flat in August. That was a surprise, given a slew of private market reports from auto dealers and retailers that sales rose last month.

Benchmark West Texas Intermediate crude gave up $1.30 to finish the day at $88.91 per barrel in New York while Brent crude lost 12 cents to end at $109.65 in London.

Tom Kloza, publisher and chief oil analyst at Oil Price Information Service, said consumer spending probably will erode further this year. Gasoline prices, which hit $3.634 per gallon overnight, are 91.7 cents higher than a year ago. So far, motorists have spent about $491 billion on gasoline in 2011, Kloza said.

"That's a bunch," he said. "Consumers are still in a very conservative, fragile mood."

Yet the Energy Information Administration said Wednesday that wholesale gasoline demand in the U.S. dropped 2.7 per cent last week. That mirrors private surveys that show a sustained drop in how much retail gasoline is being bought.

Petroleum demand isn't just falling in the U.S. Other industrialized parts of the world, especially Europe, are pulling back on fuel consumption amid a stagnant global economy.

Independent oil analyst Jim Ritterbusch said that Europe's debt problems aren't going away.

"Oil consumption will be falling short of most expectations during the coming months," Ritterbusch said.

On Wednesday, as expected, government data showed that Tropical Storm Lee took a considerable bite out of U.S. oil supplies. The storm temporarily shut down oil production in the Gulf of Mexico.

Gasoline supplies, however, rose more than analysts had expected and prices dipped.

In other commodities trading, heating oil fell added less than a penny to end at $2.945 per gallon and gasoline futures dropped 1.66 cents to finish at $2.7258 per gallon. Natural gas added 5.9 cents to end at $4.039 per 1,000 cubic feet.