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Updated from 5:13 p.m. EDT

Crude oil prices fell again Tuesday at the New York Mercantile Exchange, pressured by a stronger dollar, a report of falling oil demand and a possible resolution to Russia's military engagement with Georgia.

Trading in oil markets was highly volatile on Tuesday, with West Texas crude futures falling from $114.45 a barrel to well below $113 a barrel overnight Monday and then rebounding Tuesday morning. However, a new monthly report on oil supply and demand levels released midday Tuesday by the Energy Information Administration dealt Tuesday's crude markets a sharp blow, and WTI ultimately settled at $113.01 a barrel.

After-hours trading Tuesday evening has been light. At 8 p.m. EDT, West Texas crude is gaining 20 cents at $113.21 a barrel, natural gas is edging up 4 cents at $8.37 per million British thermal units, and futures for reformulated gasoline and heating oil are both unchanged at $2.84 a gallon and $3.08 a gallon respectively.

Russian President Dmitri Medvedev appeared on Russian state television early Tuesday morning, saying that Russia's military strike against Georgia has been put on hold but could resume immediately if Georgia does not adhere to specified demands.

Medvedev did not say when he will remove Russian troops from Georgian soil. He demanded that Georgian troops first withdraw from their defensive positions and that it sign a "binding agreement on non-use of force."

While Medvedev's foreign minister mentioned at a separate briefing that he thought the relationship between the two countries would likely improve if Georgian President Mikheil Saakashvili were to step down, Russia's president did not mention the issue during his televised speech.

Alarm bells sounded when Russian troops came close to capturing the BTC pipeline, which was built in order to circumvent Russia and transport crude oil from the Caspian Sea to Europe. Russia's dominant role in supplying Europe with oil and natural gas has long been a major weakness to European foreign policy.


(BP) - Get BP Plc Report

, which owns roughly 30% of the BTC Pipeline, announced Tuesday that it shut down two of its legs in the heat of the conflict, reducing the line's output from 850,000 barrels per day to 250,000 barrels per day. A company spokesperson said that the line was not bombed or attacked during the affair, and that it will remain closed until the company is comfortable with the geopolitical risk level in Georgia.

Meanwhile, the EIA reported a stunning freefall in U.S. oil consumption for the first six months in 2008 in its August short-term energy outlook released Tuesday afternoon. Domestic consumption was estimated to have fallen 800,000 barrels per day compared to the same period in 2007, caused by slower economic growth and high oil prices.

The report states that the decline "was the largest half-year consumption decline in volume terms in the last 26 years, when, in the first half of 1982, consumption dropped by nearly 800,000 bbl/d."

Crude oil's rising from $18 to $35 a barrel during the 1979-1981 time span as a result of the Iranian Revolution caused the first-referenced fall in consumption. The price spike caused a "demand destruction" trend in the early 1980s similar to what are seeing now, according to Jim Williams, energy economist at WTRG Economics.

Petroleum Consumption and Price

Click here for larger image.

The 1981 oil price spike and its effect on U.S. oil consumption are both represented in the above chart. The loss in oil demand caused by the surge in that particular period of rising oil prices was a devastating blow to the entire U.S. energy industry. It took the oil companies more than 20 years to erase the consequences of that price spike and get back to 1979 oil production level.

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"Much of the demand destruction occurring now will be permanent," Williams said. "It will not quickly rebound if crude oil prices fall all the way to $60 next year as some analysts are now predicting."

Wednesday at 10:35 a.m. EDT the Energy Information Administration will release its weekly report on U.S. petroleum stores. The report will also include data on domestic oil consumption for the most recent one-week and four-week periods. Last week's EIA report estimated that oil consumption during the four-week period ending Aug. 1 fell 20.1 million barrels, or 2.6%, relative to the same period in 2007. Consumption for the week ending Aug. 1 was said to have dropped 4.1% year-over-year.

The EIA's weekly crude oil reports mostly rely on estimations that are ultimately validated two or three months after the first numbers are originally released. Economist Jim Williams says that the most recent string of EIA reports have all recorded large downward revisions to their previous consumption predictions.

Elsewhere in energy markets, Tuesday's cease-fire order in the Russia/Georgia conflict was good news for BP and its BTC pipeline, causing BP shares to jump 1.2% to $60.97. However, the rest of the integrated energy group moved lower Tuesday.


(COP) - Get ConocoPhillips Report

slid 0.4% to $79.95,


(CVX) - Get Chevron Corporation Report

shed 0.6% to $83.56, and

Exxon Mobil

(XOM) - Get Exxon Mobil Corporation Report

fell 1.6% to $76.88.


U.S. Oil Fund

(USO) - Get United States Oil Fund LP Report

, an exchange-traded fund that closely tracks the performance of WTI crude oil futures contracts at the Nymex, finished down 1.1% at $91.49.

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