The price of oil dropped more than two per cent Wednesday as the sluggishness of the economy was underscored by more pessimism from the Federal Reserve and a surprising jump in U.S. oil supplies.

Benchmark U.S. crude closed down $2.23, or 2.65 per cent, at $81.80 US per barrel on the New York Mercantile Exchange. Brent crude, which is used to price much of the oil imported into the U.S., lost $3.45 to $92.57 per barrel in London.

Oil has been sliding for several weeks as the global economy appeared to slow down.

The Energy Information Administration said oil and gasoline demand dropped last week in the U.S. Supplies also grew by 2.9 million barrels, a surprise for analysts who had predicted that supplies would fall by 600,000 barrels.

Oil supplies have risen this year to the highest level since 1990, thanks to a boom in North American production.

"The U.S. is flush with oil right now," independent analyst and trader Stephen Schork said.

World has 'comfortable' supply

"And if you factor in the economic mess in Europe, slower economic growth in China, and probably overproduction from the Saudis in preparation for the Iranian oil embargo, the world has a comfortable supply" of oil.

Oil prices fell further in the afternoon when the Federal Reserve said it was concerned about a weak jobs market in the U.S.

The Fed, which concluded a two-day meeting on Wednesday, said it would try to spark more consumer spending and borrowing by keeping long-term interest rates low.

Michael Lynch, president of Strategic Energy & Economic Research, said many investors were hoping for stronger action by the Fed, and many of them focused instead on its dour outlook for the economy.

Keeping interest rates low "is kind of like kissing your sister," Lynch said. "You're doing something, but it's not as big of a deal as you'd expected."