Oil dips as government weighs auto aid

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NEW YORK (CNNMoney.com) -- Oil prices fell Friday as investors responded to uncertainty surrounding the government's proposed bailout of the auto industry.

U.S. crude for January delivery slipped $1.70 to settle at $46.28 a barrel.

Prices had fallen to as low as $43.32 earlier in the session after Senate Democrats and Republicans failed to reach a compromise on a $14 billion bill, which would have provided emergency loans to General Motors and Chrysler.

In an effort to reinforce automakers, the White House said it would consider using cash set aside as part of the $700 billion financial system bailout to offer loans to automakers.

"If they don't come up with something, you're not only going to lose a lot of direct jobs, but it will cascade to all the suppliers," said James Williams, energy economist with WTRG Economics in Arkansas. "This will ripple through the economy from Michigan on south."

An automaker bankruptcy would be "too big of a body blow to the markets," said Tom Orr, head of research for brokerage Weeden & Co. "They can't just let them fail. I think it would be disasterous."

Job loss risk: Investors worry that the failure of one or more of the big automakers could weigh heavily on the economy of the United States, the world's largest oil consumer, which has already seen job losses spike to the highest level in decades.

"Anything that's bad for the economy is bad for crude oil prices," said Williams.

The auto industry employs about 2 million workers, according to the Center for Automotive Research. That total includes GM (GM, Fortune 500), Ford (F, Fortune 500) and Chrysler workers, as well as dealers and workers at parts manufacturers.

On Thursday, the Labor Department reported that the number of Americans applying for state unemployment benefits rose to a 26-year high last week.

OPEC cuts: Oil prices came off their lows in afternoon trading as investors were also anticipating a large production cut from the Organization of Petroleum Exporting Countries, an international trade cartel whose members produce about 40% of the world's oil.

The price of crude oil, which has fallen more than $100 a barrel, or nearly 70%, since hitting a record high of $147.27 in mid-July, has been weighing heavily on many producers who rely on oil profits to support their local economies.

"They are desperate to get the price of oil up," said Orr, adding that he thinks "they're going to do it in one shot with the hope that they can hold [oil] to $40."

OPEC President Chakib Khelil told the Associated Press earlier this week that the oil market could expect to see a "severe" cut in production levels in order to bolster prices.

Some analysts have said the group could cut production by as much as 3 million barrels a day.

The group is scheduled to meet Wednesday to make a production decision.