Oil prices fall sharply as dollar gains

NEW YORK -- Oil prices fell sharply Tuesday, dropping below $124 a barrel as demand concerns grew and Federal Reserve Chairman Ben Bernanke indicated that more interest rate cuts are unlikely. Bernanke's comments sent the dollar higher and raised questions about oil's ability to reach new highs in the short term.

Light, sweet crude for July delivery fell $3.45 to settle at $124.31 a barrel on the New York Mercantile Exchange. Prices dipped as low as $123.87 in after-hours electronic trading. It was oil's lowest trading and settlement levels since May 15.

Prices peaked at $135.09 on May 22; its settlement Tuesday was $10.78, or 8 percent, below that record.

Retail gas prices, meanwhile, rose slightly to a new record near $3.98 a gallon, but could fall if oil prices continue to decline.

The latest MasterCard SpendingPulse survey found that demand for gasoline fell by 4.7 percent last week -- which included the long Memorial Day holiday weekend -- compared to the same week last year. Averaged over the last four weeks, demand was down 6 percent last week compared to last year.

That dovetails with recent data from the Energy Department and Federal Highway Administration, as well as several other surveys suggesting high prices are cutting American's appetite for fuel. A new survey by RBC Capital Markets finds about 90 percent of Americans have made changes in their daily lives to counter high energy prices, including driving less and taking public transportation more often.

On Tuesday, General Motors Corp. said it would close four truck and SUV plants in the U.S., Canada and Mexico as surging fuel prices hasten a dramatic shift to smaller vehicles.

"Investors are ... wondering if we've got to the point, with prices around $130 a barrel, if that's too much for consumers to bear," said Rachel Ziemba, an analyst at RGEMonitor.com in New York.

Also weighing on prices was the strengthening dollar. In a speech via satellite to an international monetary conference in Spain, Bernanke suggested that further rate cuts are unlikely because of concerns about inflation. Since last year, a series of Fed cuts designed to shore up the economy has led to a protracted decline in the dollar's value against the euro. That helped feed the record runup in oil prices as investors bought commodities such as oil as a hedge against inflation.