Ty J. Young Editorial
Although it lacks the flair of a James Bond movie or the intrigue of a Cold war spy novel, the agreement between Saudi Arabia and Russia to cap oil production output at January 2016 levels could be a political game changer.
Americans have been enjoying unprecedented savings at the pump over the last 18 months, and our own production capacity has skyrocketed over the last decade. But we ignore the risks of this new relationship at our own risk. In short, this is one of many moves taking power away from America and sending it to others. In this case, the Russians.
I. How the Saudi-Russian oil deal could affect the U.S.:
- Russia trying to dethrone king dollar: The dollar has been stronger than ever, but long term Russia and other adversaries want to remove the dollar as the world’s primary reserve currency. Oil is priced in dollars – controlling the oil price and oil market share puts a big dent in dollar importance.
- Russia taking more oil market share. Russians and Saudi Arabians lost control of the market when U.S. shale oil producers, along with U.S. Natural Gas, began taking sizable portions of the global oil market share. Oil priced in U.S. dollars … U.S. gaining market share … price drops hurting their budgets … the Russians had to make a move. Traders now realize the price and the market will be set in Saudi Arabia and Moscow, with a growing voice from Iran.
- Russian move against U.S. allies. From Syria, to attacks on NATO (North Atlanta Treaty Organization) ally Turkey, and now they are making deals with long-time U.S. ally Saudi Arabia over oil production. This is pushing the U.S. out of the region, leaving NATO’s southern flank exposed, creating fear in other U.S. allies, such as Jordan, and endangering U.S. friend and ally Israel.
- Russian move against our markets and economic interests. U.S. banks are exposed to energy bonds and shale oil companies that are going bankrupt at a fast rate as oil prices have dropped. Many are calling these loans the “new sub-prime,” in reference to the real estate debt which helped caused the 2008 financial collapse. Controlling oil production and the price of oil affects the value of the dollar. These moves can cause havoc to banks, corporations and therefore the U.S. stock market and economy as a whole.
II. Why the Saudi-Russian oil deal matters to you:
- Bad for the dollar, bad for all of us. The dollar as the world reserve currency has given us control of the global economy and has allowed us to run deficits at low interest rates. If the dollar is eventually moved out of or replaced for international transactions, it will drive our interest rates up and will force drastic cuts in the U.S. budget. Jobs, social welfare and markets will ALL be negatively impacted.
- Bad for our friends. Under our current government, the Middle East seems to have been handed over to Russia and Iran. After decades of spending our blood and treasure, our role and leadership was given up seemingly overnight. Our friends, like Saudi Arabia, see no choice but to cut deals with Russia. Other friends, like Israel, Jordan, and Egypt, are fearful of our withdrawal. Those changes come with a heavy price to our reputation, which usually means we will be paying down the road in even more blood and treasure.
- Bad for our economy. This deal strikes at the heart of our energy industry. It will put a ton of downward financial pressure on dozens of U.S. energy companies. We could see energy company defaults spike and an increase in bankruptcies. This will put greater stress on banks. Layoffs and broader defaults could follow. The energy industry is heavily reflected in the Dow and S&P meaning your retirement money will be affected as well.
Lower oil prices have been great for consumers. Moderately higher prices could help the U.S. energy industry while, at the same time, remaining as a savings for consumers. What we do not know, and what is causing fear in U.S. markets, is how the Saudi-Russian oil production deal could impact our markets and our economy over the long haul. These risks cause uncertainty and volatility – both can wreak havoc with your retirement portfolio … but not if your money is protected.
Where can you find protection from the global events affecting markets today? Call now to find out. 877-912-1919.