Financial Collapse or Recovery Ahead? Watch out closely the Saudi-Russian power play

I believe the American economy’s fate near term will be mainly determined by the Saudi-Russian power play in the making. If Saudi Arabia drifts out of America’s orbit, our ability to avoid financial collapse will be difficult if not impossible.

Low oil prices have indeed kept inflation today down, allowing the Fed to continue stalling on a normalization of U.S. interest rates. A rise in oil prices likely would result in increased inflation. This would remove a crucial public excuse, enabling the Fed to justify zero interest rates.

I have been arguing for many years now that the Fed will not normalize interest rates, other than a possible token 0.25 percent, until forced to do so by market forces. I think those market forces are already in play and will be more so with a Russian – Saudi close collaboration on oil prices.

How dependent are Russia and Saudi Arabia from each other?

It is clear to everyone today that Russia’s finances have been devastated by the drop in crude prices and by the U.S.-led NATO sanctions imposed for the Ukraine incursion. To maintain its viability, Russia must seek to push up the price of oil by any means at her disposal. Coordinated production agreements between Russia and Saudi Arabia could offer Russia that possibility. However, this would not be in America’s interest.

Once again, rising oil prices would add to inflation pressures and put more pressure on the Fed to raise rates. A higher oil price leading to inflation may provide such pressure if not to the Fed directly, then to international bond markets. A market-triggered interest rate increase likely would do damage to the credibility of the Fed, the international monetary system and to the current prices of financial assets standing at inflated prices, including bonds, equities and, over the short-term, real estate.

As a high cost producer, Russia can’t survive in a long term low price environment. Same goes for Saudi Arabia…. as it needs to sell oil at around $106 to balance its budget; so it barely has enough fiscal buffers to survive 5 years of $50 oil.

Traditionally, Saudi Arabia has agreed to align its own oil production policies to the broad strategic interests of the United States in exchange for U.S. protection against its regional rivals, in particular the Shiite state of Iran. But the Obama administration’s recent courtship of Iran (through its nuclear treaty), its failure to support allies in Egypt, and its hesitancy to follow through with threats against Syria, might be encouraging the Kingdom to seek newer, more reliable allies.

I strongly believe the US should do all what it can to keep Saudi Arabia in its orbit if not I am afraid all hell will break loose to the US economy.

Share your thoughts….

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