Regional War, Crude Production, and a Depreciating Dollar (FREEPOM)

Economics, FREEPOM, Geopolitical

How the Collapse of the House of Saud could salvage the Global Economy

By JC Collins

This is a follow up to the article titled “Are We on the Eve of War – Is the US Leading Saudi Arabia down the Kuwaiti Invasion Road?” published on February 9, 2016.

Saudi Arabia could quickly find itself on the wrong side of international geopolitics.  The course which could lead the Kingdom down this path would be a combination of refusing to cut oil production in an effort to boost the value of crude, and the strategy which it has implemented along with Turkey to overthrow the Assad government in Syria.

Dealing with the conflict in Syria first, we see that both Saudi Arabia and Turkey have pushed the world’s powers into a position where war between Russia and NATO has become a real possibility.  Such a conflict must be avoided at all costs.  The regional ambitions of both countries have collapsed in front of the continuous military onslaught from the joint forces of Russia, Iran, Hezbollah, along with the Syrian government forces themselves.

Time is running out for both Turkey and Saudi Arabia to salvage a strategy of regional dominance to replace the waning power-balance which the United States has held for decades.  The replacement of Assad in Syria was always the final chess move for this new balance of power to be effectively realized.

Without a change of power in Syria, both Saudi Arabia and Turkey have no means of preventing a larger alliance between Iran, Syria, Iraq, and Hezbollah in Lebanon.  This alliance will continue to be supported by Russia and will see further advances towards its regional objectives.

The internal political and socioeconomic challenges this shift of power will have within Turkey and Saudi Arabia will be dramatic.  The government of Recep Tayyip Erdoğan in Turkey is already under pressure from a Kurdish independence movement which has grown stronger in recent years.

The House of Saud has always been a few bad years away from collapse.  I remember having a heated discussion about the fall of the House of Saud back in 1998 while drinking in a pub.  Its grip on power has been of strategic regional interest for the United States.  The macroeconomic importance of OPEC energy sales being denominated in US dollars is now beginning to give way to more multilateral monetary objectives which are meant to correct global imbalances and promote growth.

The thought of major world powers, who are all aligned on the new macroeconomic and monetary mandates, allowing this regional conflict to spiral into a world war is unrealistic.  The conclusions of so many have predicted such an outcome, but the consequences of such an outcome would work against the larger monetary and geopolitical mandates.

A few days ago a Saudi oil minister made a statement which suggested that high-cost producers get out of the market.  This one statement is extremely telling of the check-mate position which Saudi Arabia has put itself in.  It can’t cut production because to do so further erodes its market share and can cause an evitable collapse of social programs within the country.  The House of Saud depends heavily on these social programs and public trusts to keep demographic restlessness at a minimum.

As such, cutting production is not a viable negotiating strategy for the Kingdom.  The difficulty of this is compounded when we come to the conclusion that the House of Saud cannot negotiate and accept a continuation of Assad’s rule in Syria.  The growing alliance between Iran and other players in the region will also place incredible pressure on the Saudi regime.  Like Erdogan in Turkey, this pressure will eventually lead to revolutions and new governments being installed in both Ankara and Riyadh.

In simple terms, Saudi Arabia cannot cut production and they also cannot accept the Shiite shift to balance of power in the region.  Both will lead to the fall of the House of Saud.

The fact that any attack on Syria by either Turkey or Saudi Arabia, or both, will escalate the conflict and put Russia and NATO on a collision course, does not bode well.  The recent ceasefire which has been implemented by both Russia and the United States is telling of the direction in which major world powers would like to see things go.

Whatever has happened in the past, the regional objectives of Turkey and Saudi Arabia are now working against the larger macroeconomic and geopolitical strategies of both Russia and the United States.  This will not end well for the smaller players.

In the post “Are the G20 Nations about to depreciate the US Dollar” we reviewed how a depreciation of the dollar against select currencies could promote global growth and help increase the price of commodities.  This is a very real and tangible discussion which is taking place at this weekend’s G20 Summit in Shanghai.

Whether it happens this weekend, or seeds are planted for later this year, the reality of major changes coming to the international monetary framework can no longer be denied.

Along with the US dollar depreciating to promote international growth and an increase in commodity valuations, crude prices themselves will also have to increase to facilitate the overall macro-strategy.  This increase in crude prices will likely take two or three different motivators.

One would obviously be the dollar depreciation described above.  Another will only happen with a reduction to global production.  Considering the refusal of Saudi Arabia to cut production, this motivator is unlikely to come about willingly.  A third motivator will come with an increase in demand through global growth.  A depreciation of the USD and appreciation of the Chinese RMB would facilitate such a turnaround in growth.  But it will take time.

In all probability, it will take all three motivators to push the international economy out of its present contraction.

The United States will not accept a collapse of its Shale Oil production in order to appease and allow the Saud family to remain in power.  The changing international monetary framework is such that American crude exports will serve a vital macroeconomic purpose in the months and years ahead. Which is why the crude exporting ban in America was finally lifted after four decades.

In the lead up post to this one, the possibility of the US leading Saudi Arabia down the road of invasion like it did to Iraq in 1990 was presented. The situation for Saudi Arabia is invade Syria or be removed from the balance of power in the Middle East. Yet invading Syria will also lead to the same outcome. Will they take the bait?

Any response to the House of Saud invading Syria will likely lead to an attack on Saudi oil fields and facilities.  This would cause a dramatic decrease in production.

 Such an invasion would be welcomed by the Iranian and Syrian alliance, as it would give them the pretext to remove a problematic regional player.  Both Turkey and Saudi Arabia are in unsustainable positions.  Each country is standing between war or peace, as well as global recession or economic growth.  – JC

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