NEW YORK - Oil prices dropped below $40 Friday as the government reported U.S. employers slashed more than a half million jobs last month, the most in 35 years.
Light, sweet crude for March delivery fell $1.67 cents to $39.50 a barrel on the New York Mercantile Exchange. Gas prices edged close to $2 a gallon as refineries took units temporarily off-line for seasonal maintenance.
The Labor Department reported 598,000 jobs were lost in January. The unemployment rate rose to 7.6 percent, the highest since 1992.
Oil traders see layoffs as an instant drag on oil demand. People have less need for gasoline when they no longer have a daily commute. They also cut their spending for toys, nonstick pans, raincoats and millions of other products that are made with petroleum.
"The economy's ugly. We know it's ugly," analyst and trader Stephen Schork said. For a sustained rebound in oil prices, "you have to stop seeing the economy contract. You have to stop seeing people get laid off. We probably won't see much of that this year."
The number of people remaining on the unemployment compensation rolls increased slightly to nearly 4.8 million, the most since records began in 1967.
Many more are likely to come. Chrysler LLC said Friday it will temporarily close four assembly plants next week because of weak U.S. sales. Spokesman Max Gates said additional closures are possible because the company reviews its production schedules every week.
With millions of people out of work, drivers are logging billions of miles less compared with last year. Still, gas prices have frustrated motorists. With fewer cars on the road, gas prices should go down. Instead they're on the rise.
Retail gasoline prices on average rose less than a penny to $1.91 a gallon Friday, up from $1.73 a gallon a month ago but still less than the $2.97 a gallon average of a year ago, according to AAA, the Oil Price Information Service and Wright Express.
Andrew Lipow, president of Lipow Oil Associates in Houston, explained that unlike crude oil, gasoline prices are rising because supplies are under pressure this time of year as refineries take units offline for maintenance.
Also, refineries on the east and west coasts typically buy different, more expensive grades of oil than what's reported because of their distance from Nymex's delivery point in Cushing, Okla.
Cheaper grades of crude can't travel "from Cushing to the Gulf Coast or California or even the East coast. So refiners in these locations have to purchase crude that's more expensive," Lipow said.
Amid the gloom, some companies are performing above analysts' beaten-down expectations. Wal-Mart's sales beat Wall Street's forecasts and Macy's department store, which this week said it would slash 7,000 jobs, raised its fourth-quarter and full-year forecasts.
Elsewhere, investors also are keeping a wary eye on China and other developing countries for signs of how far the global recession has spread. Chinese factories were expected to continue to pump up oil demand, but experts are no longer betting on this.
Recent reports from the Chinese government say 20 million people have been thrown out of work, and experts now believe that the country's once-burgeoning economy has stalled.
Oil traders also are watching for possible further production cuts by the Organization of Petroleum Exporting Countries, which has already promised to reduce output by 4.2 million barrels since September.
OPEC leaders have said they may reduce supplies again at the group's next meeting in March.
"I think they'll try to talk the market up rather than actually cut again," said Gerard Rigby, an energy analyst with Fuel First Consulting in Sydney. "They still need to sell their oil to get revenue."
Oil prices won't likely fall much below $40 a barrel and should trade in the $50s by the end of the year, Rigby said.
"In second half, the economy should be turning around, and once we see that, commodities should start to improve," Rigby said.
In other Nymex trading, gasoline futures fell 3.14 cents to $1.2434 a gallon. Heating oil dropped 3.61 cents to $1.3311 a gallon, while natural gas for March delivery rose 2.5 cents to $4.667 per 1,000 cubic feet.
In London, the March Brent contract gave up $1.11 at $45.35 on the ICE Futures exchange.
Associated Press Writer Alex Kennedy in Singapore contributed to this story.
