As we enter 2015, we think a case can be made that the next 12 to 24 months will go down in history as the most important in the history of capitalism and the West. As it stands now we think—and desperately hope we are wrong—that the period immediately ahead will be one in which the East establishes itself as at least equal and probably more than equal to the West. It could easily be a time in which the dollar’s days as the world’s reserve currency clearly become limited. And it may be a period, as we explain below, in which that ever-narrow tight rope the West has walked between inflation and deflation finally so narrows that it becomes impossible to remain balanced. Our guess (and hope) is that when the West falls off the tight rope it will be on the side of inflation.

The biggest surprise of 2014 came toward the end, in which several years of range-bound oil prices suddenly turned into a major rout. We think coming to grips with this out-of-the-blue event is key to understanding what lies ahead and how investors should prepare for the nearly assured turbulence that will characterize the period ahead.

While there has been a lot of analysis on the oil drop, most has centered on how unexpected it was, how well U.S. frackers will hold up, and the ultimate outcome for the U.S. economy and stock markets. Regarding effects on international players, most commentary has centered on the Russian economy and the potential results of the oil shock for Putin and Russia generally, as well as how they might affect Ukraine and other parts of Europe, which hold a great deal of Russian debt. This is all very relevant but misses the proverbial elephant in the room—namely, China.

Whether over Saudi Arabia, Russia, India, or even Japan, clearly China intends to use its economic power; in terms of one very important measure, purchasing power parity (PPP), China already surpasses America. Now it wants to reestablish a unified East for which China serves as the Middle Kingdom. The country has seen its trade with virtually all major Eastern countries grow rapidly if not exponentially over the past 10 to 20 years. Moreover, China has engaged in military exercises with countries ranging from Iran to Russia. We believe that China’s major goal is security, not any sort of imperialism—unless asserting power is necessary for its own security.

One reason China has likely replaced America as Saudi Arabia’s most important friend is the former’s indifference to the kingdom’s monarchy and its form of government. In fact, China does not really care how the Saudis govern as long as the peninsula remains stable and poses no threats to China.

Indeed even within its own borders China remains indifferent to religions so long as they do not threaten the state. More than that, if a religion or varied viewpoint does not threaten the state, it is often encouraged. Such thinking was highlighted and encouraged during the 16th century after the travels and through the influence of Cardinal Matteo Ricci. But Christianity in China goes back to at least the 8th century. The expulsion of Christian missionaries during the Mao regime has quietly been reversed with virtually full toleration of all religions that pose no threat to the state.

We make these points to emphasize as strongly as possible that China keeps its goal laser focused on the wellbeing of its population, meaning many of its actions should first be seen as China’s relatively long-term efforts to increase its economic control over its fate—particularly by all means monetary and energy-related. Moreover, though China’s military technology trails that of America by a very wide margin, it has narrowed that military gap vastly as it joins other Eastern powers in military exercises. Also, China has become a major cyber power. When China introduced its new 5th generation fighter, and stated it was more than a match for the comparable F-35, America’s leading 5th generation, Jane’s among other impartial sources observed that the Chinese assertions could easily be true; Chinese spies obtained  plans for the F-35 and the state’s engineers went from there. Unfortunately there are few reasons to doubt the credibility of such statements.

You would have to be blind, deaf, and dumb not to think that China and America are vying for worldwide hegemony – and blind, deaf, and dumb to not think China is rapidly gaining ground on us. China’s amoral attitude to everything but its own wellbeing was nowhere better illustrated than in events involving Russia in 2014. While the West condemned Russia’s seizure of Crimea as morally reprehensible and intolerable in a civilized world, China said nothing. When the West backed up its moral stance with sanctions that arguably harmed the West nearly as much as Russia, China inked a massive energy deal with Russia and invested in Russian companies. The total value of these investments will likely top half a trillion dollars.

And when oil prices fell by 50 percent, threatening the Russian economy with a severe recession, China responded by further strengthening their ties by offering the former further economic help not least by defending the ruble. China also added that they would bring Russia’s economic distress before the Shanghai Cooperation Organization (SCO), to further assist the beleaguered Russian economy.

Here I confess though I have followed China pretty closely for some time, the SCO was not an abbreviation with which I was familiar. After a little research I am convinced that everyone in the West who does not want to simply turn over to China the keys to world should pay close attention to the SCO. The Shanghai Cooperation Organization in its current form was established as an economic and military organization with six members—China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan, and Uzbekistan. Wikipedia reports that these nations account for 60 percent of the land mass in Eurasia and 25 percent of the world’s population. Moreover, five additional countries—Afghanistan, India, Iran, Mongolia, and Pakistan—hold observer status, a prelude to full inclusion. The observer states and permanent SCO members together encompass half of humanity. Not to mention several more dialog partners and guest attendees of SCO summits and informal meetings.

While some have argued that the sharp reduction in oil prices engineered by the Saudis was a favor to America to put pressure on Iran and Russia, we doubt it. Just ask yourself, which country benefits more, China or America. No contest: China, which while less dependent on it than the U.S., still imports more oil from the Saudis than America, not least thanks to the U.S. shale oil industry. While China has used low current oil prices to import record amounts of oil for future use, Saudi Arabia actually has dealt the U.S. shale industry a heavy blow. Indeed even if oil prices were to recover quickly, we doubt that the shale industry will ever find the degree of funding it did in the past. Volatility alone is a major roadblock to longer-term capital budgets.

Also, sharp OPEC-engineered drops in oil in the past—consider especially 1985-86—have led to quick rebounds, but this time we expect to see a rebound in which the shale industry cannot fully respond. We also expect a rebound that will put the Fed in a box. If the U.S. central bank treats rising oil prices like it did in 2008, as an inflationary event, it will risk a replay of the economic devastation experienced in 2008-09. Indeed just as falling oil prices stimulate growth while lowering inflation, rising oil prices manifest the opposite effect. Thus the Fed will need to pick its poison: either react to the inflationary aspect of oil prices or the deflationary aspects. We guess that the Fed will finesse, but err on the side of not obsessing about inflation with statements such as “high oil prices are a temporary phenomenon” and keep rates low or even lower them if the economy looks too wobbly.

Either outcome most likely will destabilize the dollar, causing the American economy to lose its allure to foreign investors. Where do you suppose the world (and in particular India) will find the oil necessary oil to finance growth if fracking produces less than projected earlier. Try Russia. Some estimates place total Russian reserves at close to 200 billion barrels with much in the expensive to explore Eastern Siberia. (Currently most of Russian oil comes from Western Siberia). The investments needed to extract that oil will likely come in large part from a neighbor to the south of Russia.

China will clearly end up with lots of control of the world’s oil, which will likely further its ties to Saudi Arabia. While many have said China no longer follows its centuries-old maxim, advertising weaknesses and hiding its strengths, we disagree. When Presidents Obama and Xi shook hands on a climate pact, many in the U.S. reacted skeptically. The critics expected China would be allowed to do nothing until the end of next decade to make the goal. In other words, there would be no way to check on China, and in the end the Middle Kingdom could say “we tried but need another decade or so.” Reality looks different to us. As John Mathews and Hao Tan note in a recent Nature article (September 10, 2014), China’s productive capacity from WWS (wind, water, and solar) is considerably more than twice the capacity in the U.S. and roughly equal to the combined WWS capacities of America, Germany, India, and Spain. Moreover, China is certain to gain additional capacity from renewables in the years ahead, as it did over the past several years. At its current pace, we expect China to actually fulfill its part of the Obama-Xi environmental bargain by the early 2020’s and maybe even sooner; 2014 was a slow year due to the uprooting of corruption in the Chinese energy industry. Mathews and Tan also take pains to show that China’s major concern is not pollution—though, of course, it would like to see cleaner cities—but economic security. I and my co-author made this point in our 2011 book, Red Alert.

Some will argue that the U.S. retains one more major trump card—gas fracking. But here too prospects may be much less than they appear. And we do not reference often-cited reports from the so-called perennial skeptics, David Hughes and Art Berman, but rather from geologists whose negative assessment of hydrocarbon production everyone should take very seriously. In a recent issue of Nature (12/3/2014), the magazine outlines conclusions from a University of Texas study on gas fracking. Cutting to the chase, the university’s geology department agrees that estimates of future gas from fracking have been overstated. Some feel the overstatements are enormous or at least very large, others think that the reductions will be significant but still leave gas in a good position. Either way, America apparently has nothing resembling a long-term energy policy, while China already has expended trillions to establish what may be an already insurmountable energy lead.

We return to SCO and its recent meetings with BRIC countries (China and Russia are members of both) and South Africa, another developing country with a massive non-oil resource base. At these meetings the two organizations laid plans for a new reserve currency. The most significant development was the 2014 establishment of a Shanghai-based New Development Bank intended to oppose the Western-dominated World Bank and the ersatz Bretton Woods system that still confers reserve status on the dollar.

Then there’s Saudi Arabia. Was its engineering of an oil market rout an act of benevolence or malice toward China? All the evidence suggests the former. It is worth noting that China has replaced America as the Saudis’ largest importer. On the other side of the trade equation, among many things China exports to the Saudis are renewable energy industry tools and manufacturing skills, in particular for solar energy. Even the Saudis apparently recognize that fossil fuels will not last forever.

If the Saudis slowly but surely are joining the Chinese camp—and they may already be there—it may just a matter of years, not decades, before oil is denominated in a currency other than the dollar. As we have previously predicted, we guess that the world’s new reserve currency will to some extent follow the Bretton Woods model and rest on a basket of currencies, say from the SCO and BRICs, exchangeable for gold. While that may not happen in 2015, next year could nevertheless be the year when it becomes clear that China’s powerful hand will make a new reserve currency inevitable.

So here are potential surprises we expect could occur in 2015. As with Byron Wein, we pick events the likelihood of which  less than 1/3rd would agree but that we think could have a better than 50 percent chance of reaching fruition.

1. Oil prices rebound sharply and the U.S. will take no action to fight the inflation caused by rising oil.
2. The world will begin to recognize that China has intentionally presented its economic state via overemphasis its weaknesses at the expense of its strengths.
3. The dollar will begin to lose its status as a reserve currency, while Germany will seek observer status in the SCO.
4. Both the dollar and euro will weaken badly while the yuan will strengthen and gold and gold-correlated investments provide the best performance.
5. The U. S. will begin to recognize its weakness and embark on a major infrastructure spending program, which will spur commodity scarcity and more inflation but may give us a chance to regain lost ground.
6. Best of all, the U.S. will finally realize that it is at war—not militarily but economical—with the East and it will require a war-like effort will to win. I have my fingers crossed.