A debt default by the U.S. federal government would shake up the global energy market, S&P Global Commodity Insights has warned, adding, however, that the chance of that happening was a slim one.
Congress is at an impasse about the debt ceiling and recent talks between President Biden and House Speaker Kevin McCarthy ended with no agreement on lifting the borrowing limit.
In truth, the default alarm gets sounded every time Congress debates the debt ceiling, and so far legislators have invariably been able to avoid a default. Should this change, it would lead to a severe recession, which would in turn affect energy demand, according to the president of S&P Global Insights who spoke to The National.
“I think markets generally believe at this point that at the last minute either a deal will get worked out or the administration will find technical ways to get around the congressional approval they need to be able to service the debt,” Saugata Saha told the Emirati daily.
If this does not happen, “It will likely lead to severe recessions, which again will have an impact on energy consumption and demand,” Saha also told The National.
According to finance officials, including Treasury Secretary Janet Yellen, the U.S. federal government will run out of money by the beginning of next month, which means time on a deal is running out.
Democrats insist that Congress passes a higher debt ceiling with no changes in spending while Republicans insist on spending cuts claiming current levels are unsustainable.
The debate is already affecting oil prices as fears of a default grow. However, if a deal gets clinched at the last moment or legislators find another way to raise the ceiling, oil prices will likely move higher in the absence of other bearish factors.
By Irina Slav for Oilprice.com
More Top Reads From Oilprice.com:
- U.S. Extends License To Operate In Venezuela To Oilfield Services Companies
- Alberta Wildfires Still Sapping Crude Oil Production
- Bank Of America Sees Oil Prices Heading Toward $90 This Year
However, the claim that a US default could wreak havoc on global energy markets by driving demand down is pure nonsense. Why should it be?
Countries needing to satisfy their oil and energy demand could pay in petro-yuan, ruble, Indian rupee, Saudi riyal or UAE dirham or even barter trade.
The dollar is fast losing its dominance as an oil currency and the impact of US oil demand is becoming less important to global oil demand.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert