Currently gas prices are averaging $3.70 a gallon in the US. Oil prices fell below $97 per barrel as US leaders failed to agree to lift the government debt limit just hours from a deadline, leaving investors to consider worst case scenarios if a default occurs. By the early afternoon on Friday, crude oil rose 4 cents and closed at $97.44 on the New York Mercantile Exchange.
According to the AAA Fuel Gauge Report: Default or a downgrade of the U.S. credit rating would have far-reaching consequences for the U.S. economy. These consequences would likely affect crude oil prices with pressure in two opposing directions. A weakening U.S. economy likely means a weaker U.S. dollar. As discussed, when the dollar weakens, crude oil prices are expected to see upward pressure as the product becomes relatively cheaper.
At the same time, a weakening U.S. economy would be expected to simultaneously weaken both commodities and equities markets, as a weakened economy demands less oil which pressures prices lower. A weakening U.S. dollar proved the primary price mover last week as crude oil prices rose throughout the week to settle just below $100 per barrel at week’s end.
Negotiations between President Obama and Republican House leadership have collapsed, risen from the ashes, only to collapse again leading into the weekend. Many in Washington continue to chalk this up to the hyper-partisan political theater that has become the norm inside the Beltway, ultimately believing that leaders in Washington have no choice but to strike a deal to raise the ceiling. However, as the August 2 deadline for default looms larger by the minute, an inherently risk-averse Wall Street has become less willing to ignore the possibility of dire economic consequences.
Additionally, some analysts expect that once the US debt issue is settled, investors will focus on strong crude demand in developing countries, particularly China, and could also push oil prices higher by the end of the year.