U.S. GOVERNMENT PUBLISHING OFFICE

30–634 PDF WASHINGTON : 2018

S. HRG. 114–787 

ECONOMIC AND GEOPOLITICAL IMPLICATIONS 

OF LOW OIL AND GAS PRICES 

HEARING 

BEFORE THE

COMMITTEE ON FOREIGN RELATIONS 

UNITED STATES SENATE 

ONE HUNDRED FOURTEENTH CONGRESS 

SECOND SESSION 

MARCH 2, 2016 

Printed for the use of the Committee on Foreign Relations 

( 

Available via the World Wide Web: 

http://www.govinfo.gov 

FOREI-42327 with DISTILLER

COMMITTEE ON FOREIGN RELATIONS

BOB CORKER, Tennessee, Chairman

JAMES E. RISCH, Idaho 

MARCO RUBIO, Florida 

RON JOHNSON, Wisconsin 

JEFF FLAKE, Arizona 

CORY GARDNER, Colorado 

DAVID PERDUE, Georgia 

JOHNNY ISAKSON, Georgia 

RAND PAUL, Kentucky 

JOHN BARRASSO, Wyoming 

BENJAMIN L. CARDIN, Maryland 

BARBARA BOXER, California 

ROBERT MENENDEZ, New Jersey 

JEANNE SHAHEEN, New Hampshire 

CHRISTOPHER A. COONS, Delaware 

TOM UDALL, New Mexico 

CHRISTOPHER MURPHY, Connecticut 

TIM KAINE, Virginia 

EDWARD J. MARKEY, Massachusetts 

TODD WOMACK, Staff Director

JESSICA LEWIS, Democratic Staff Director

JOHN DUTTON, Chief Clerk

(II)

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C O N T E N T S 

Page 

Corker, Hon. Bob, U.S. Senator From Tennessee ................................................. 1 

Cardin, Hon. Benjamin L., U.S. Senator From Maryland ................................... 2 

Adams, Timothy D., President and Chief Executive Officer, Institute of International Finance, Washington, DC ..................................................................... 3 

Prepared statement .......................................................................................... 33 

Robert Kahn, Ph.D., Steven A. Tananbaum Senior Fellow for International 

Economics, Council on Foreign Relations, Washington, DC ............................. 5 

Prepared statement .......................................................................................... 37 

(III)

FOREI-42327 with DISTILLER

FOREI-42327 with DISTILLER

(1) 

ECONOMIC AND GEOPOLITICAL 

IMPLICATIONS OF LOW OIL AND GAS PRICES 

WEDNESDAY, MARCH 2, 2016 

U.S. SENATE, 

COMMITTEE ON FOREIGN RELATIONS, 

Washington, DC. 

The committee met, pursuant to notice, at 10:04 a.m., in Room 

SD–419, Dirksen Senate Office Building, Hon. Bob Corker, chairman of the committee, presiding. 

Present: Senators Corker [presiding], Flake, Gardner, Cardin, 

Menendez, Shaheen, Murphy, and Kaine. 

OPENING STATEMENT OF HON. BOB CORKER, 

U.S. SENATOR FROM TENNESSEE 

The CHAIRMAN. The Foreign Relations Committee will come to 

order. It is a great day in America. 

We apologize for negotiating the next 3 weeks while you all are 

waiting, but we thought a couple other folks might come in. 

Today’s hearing is focusing on the effect of oil prices. With oil at 

over $100 a barrel not long ago, and now Brent being at $36 or $37 

a barrel, obviously, it has an effect on things. Let us face it, most 

Americans believe that the price of petroleum and having access to 

energy has been a part of our foreign policy. 

So today we have two outstanding witnesses to help us think a 

little bit about the impact that the prices of oil are having on our 

foreign policy and certainly on America. 

We have significant conflicts that are taking place already 

around the world, whether it is in the Middle East, where we have 

a perceived and real I think proxy war between Saudi Arabia and 

Iran that is occurring; in Eurasia, where Russia is changing the 

fabric of Europe right now and has stepped in in Syria and totally 

changed the dynamics there, yet at the same time is highly dependent upon oil resources to fuel what they are doing; in Africa, 

where Nigeria has an ongoing battle with Boko Haram, the effect 

on them is tremendous relative to their ability to function as a government; then in Venezuela, it is amazing that the people have 

spoken. Thankfully, they want change, and yet they have this 

country that should have in many ways the highest standard of living in the world because of all the resources that they have, they 

have totally mismanaged those resources for a long, long time and 

now all of a sudden, those resources are worth less in money and 

certainly creating chaos there. 

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So we are glad you are here. We thank you for being here to 

share with us your expertise. With that, I will turn it over to our 

distinguished ranking member, Ben Cardin. 

STATEMENT OF HON. BENJAMIN L. CARDIN, 

U.S. SENATOR FROM MARYLAND 

Senator CARDIN. Well, Mr. Chairman, first of all, thank you very 

much for convening this hearing. I think it is an extremely important subject that we take up, because there is no question that the 

economic and geopolitical effects of low oil and gas prices are not 

well-understood here on Capitol Hill. So I think this hearing is particularly important. 

Yesterday, I filled up my car with gasoline. I was pleasantly sur- prised that I could not get more than about $24 of gasoline in my 

tank. I remember when it was closer to $50 that it cost me to fill 

up my tank. I know that my wife, who goes over our monthly bills 

on or MasterCard, points out that we are getting the benefits of 

lower gasoline prices. It is certainly welcoming to American consumers to pay less for their gasoline prices. 

But we also know that the world economy is performing at a very 

low level today, and oil prices are part of the reason why. 

We also know that China’s appetite has been diminished dramatically on the world marketplace. All of that has added to the 

economic problems. There are many more sources of energy today 

than we have had in the past, including the Iranian oil that is hitting the market and alternative renewable energy resources. Plus, 

conservation has reduced the demand for fossil fuels. 

All that means that demand is not keeping up with supply, and 

the prices are dropping. So from $115 a barrel to $35 a barrel, a 

dramatic impact. 

So the question is, what impact does this have on the world economy? In the United States, our economy is doing fairly well. We 

have had a record number of months of job growth under the 

Obama administration. We have seen the unemployment rate reduced by more than 50 percent. And our national deficit, debt, annual growth in debt is down to what it was in 2009. 

These are all the envy of the world, so we are doing well in our 

local economy, but the global economy, obviously, we are very much 

dependent upon. So if you are Iraq or Russia or Nigeria or Venezuela, where you are very dependent on fossil fuel in your economy, this is having a major impact. 

It is also having an impact on the stability of these countries. 

These are not the best of governed nations in the world. When you 

put on top of that the problems of energy prices, it really does compound the concern about world stability. 

Those countries that have embraced diversified energy sources 

are doing well. There are many countries that have said, look, we 

are going to go all in on alternative energy and renewable energy 

sources, recognizing the resource curse of the past, saying, look, we 

can figure out a better way to handle our economic growth moving 

forward. These countries have benefited from these types of policies. 

So I look forward to hearing from our two witnesses. I think this 

is an incredibly important subject, but one on which we need more 

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information. And we have two experts today, and we thank them 

both for being here. 

The CHAIRMAN. Thank you so much. We will now turn to our witnesses. 

Our first witness is Mr. Timothy Adams, president and chief executive officer of the Institute of International Finance. We thank 

you for being here. 

Our second witness is Dr. Robert Kahn, senior fellow for international economics at the Council on Foreign Relations. We thank 

you for lending us an outstanding person to run our committee, by 

the way, from the Council on Foreign Relations. 

But we thank you again both for being here. I know you understand you can summarize your comments in about 5 minutes. 

Without objection, your written testimony will become part of the 

record. With that, if you would begin, we would appreciate it. 

Mr. Adams, thank you. 

STATEMENT OF TIMOTHY D. ADAMS, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, INSTITUTE OF INTERNATIONAL FINANCE, WASHINGTON, D.C. 

Mr. ADAMS. Thank you, Mr. Chairman, Ranking Member Cardin, 

and members of the committee. 

It is an interesting topic, and let me just step back for a minute 

and paint a broader picture. I just got off a flight from spending 

a week in China. We had an event alongside the G–20 meeting, so 

I had an opportunity to spend my weekend with most of the G–20 

finance ministers and central bankers. 

I will tell you, there is real concern about global growth. Global 

growth is anemic. We have had the fourth straight year of sub-3 

percent growth. Global trade volumes are a fraction of pre-crisis 

levels. We have lost $10 trillion worth of wealth in global markets 

since June of last year. Rising debt levels globally since 2009. 

Emerging market debt has gone from 154 percent of GDP to 213 

percent. 

Emerging market corporate debt has gone from 67 percent of 

GDP to 101 percent, almost doubling. Thirteen percent of that is 

foreign currency denominated, mostly dollars, but some euros. 

Last year, our own analysis showed that net capital flows out of 

the emerging markets was a record $735 billion, and an estimated 

$48 billion this year. Record outflows. 

Slowing productivity, falling return on equity, falling earnings, 

falling pricing power, rising NPLs, historic credit downgrades. S&P 

just set a record for the number of downgrades and credit watches 

they put in place for emerging market corporates. And even 

sovereigns overnight, Moody’s put a warning on Chinese sovereign 

debt, which I found interesting. 

Central bankers are engaged in quantitative easing and potentially at the end of this historical policy experiment, so there is a 

question about the viability of additional quantitative easing. Are 

we at the diminishing returns of this policy measure? 

Fears of deflationary pressures. Close to thirty percent of developed market sovereign debt is now trading at negative yields. 

About $7 trillion worth of sovereign debt, negative yields. 

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Fiscal policy is paralyzed in many parts of the world, and banks 

are struggling. European banks have around ÷1.1 trillion worth of 

NPLs. They face a flat yield curve, which means their net interest 

margins are narrow. They are facing new entrants. They have high 

compliance costs. And it is not clear how they will manage their 

balance sheets. And then there are political uncertainties that overhang global markets. Brexit, the fear that the U.K. will vote in 

June to leave the EU, and then our own presidential election cycle, 

which was the talk of the G–20. Certainly, lots of questions about 

my own party’s direction. 

With that, we have the issue of oil prices. You mentioned a 70 

percent drop in oil prices since mid-2014. In our own analysis, 

which you noted is a part of the record, we have ranked countries 

based on what we see as most vulnerable, code red, the next level 

of vulnerability, code orange, and so on and so forth. 

For the most vulnerable, we see Venezuela—I know my good 

friend Dr. Kahn will talk about Venezuela—Iraq, Libya, Angola, 

Bahrain. The next level of concern, Nigeria, Russia, Azerbaijan, 

Oman, and Algeria. They are all different. 

If you look at them as a group in the last year, there actually 

has been a fairly substantial amount of adjustment going on, fiscal 

tightening, higher taxes, higher fees, spending cuts in a lot of 

places. 

Notably, with respect to subsidies, there are lower subsidies for 

gasoline or domestic fuel subsidies or higher fees on utilities. We 

see that in Saudi Arabia, for example. 

Then cuts in discretionary, unfortunately, many times investment in capital expenditures and infrastructure. 

Military expenditures seem to be walled off, especially in places 

like Russia. 

We have seen exchange rate flexibility, either depreciation or devaluations. Many oil producers drawing on their reserves. 

Here is where sovereign wealth funds have actually been an important shock absorber, as many countries have relied on their foreign net assets as a way to cushion their various imbalances. Borrowing more from abroad. And then there is some diversification 

with respect to economic activity. 

But still, there is huge exposure externally with respect to their 

physical exposures—Angola, Saudi Arabia, UAE, and exposure to 

China as well. Angola stands out. 

Domestic political instability in Libya, Iraq. Sanctions, geopolitical risk in Russia. And then poor and brittle institutional 

quality and lack of public trust, again, Nigeria and Angola. 

There are some benefits to this massive terms of trade shock. 

The ranking member noted it has been a substantial boost to consumption globally. It is like a massive tax cut, so we have seen a 

positive impact in the U.S., Europe, and Japan, and many other 

emerging markets like India, Indonesia, and Turkey, for example. 

We do see countries responding by reducing distortion-producing 

subsidies, so there is a positive aspect. 

And one benefit is the observation that many of these countries 

have had in place for some time really strong sovereign balance 

sheets. I think that is a powerful feedback mechanism to tell these 

countries that, in good times, they really need to build reserves and 

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ensure they have appropriate and solid macroeconomic regimes in 

place. 

And I will conclude. One positive aspect is that we are seeing 

more transparency in many places, Nigeria, for example, which is 

forcing better government. In fact, real reform in some of the oilproducing infrastructure and decision-making processes in many of 

those countries. Greater transparency on how these revenues are 

collected and where they are spent I think is positive not only for 

those countries, but also globally. 

With that, Mr. Chairman, thank you. 

[Mr. Adams’s prepared statement is located on page 33 of this 

transcript:] 

The CHAIRMAN. Thank you very much. 

Dr. Kahn? 

STATEMENT OF ROBERT KAHN, PH.D., STEVEN A. TANANBAUM 

SENIOR FELLOW FOR INTERNATIONAL ECONOMICS, COUNCIL ON FOREIGN RELATIONS, WASHINGTON, D.C. 

Dr. KAHN. Chairman Corker, Ranking Member Cardin, members 

of the committee, thank you very much for the invitation to testify 

today on this important topic. In my opening remarks, drawing 

from my longer testimony, I would like to touch on the outlook for 

prices, why I think 2016 will be a year of intensified pressures on 

emerging-market energy exporters, and explore some of the policy 

options that we all have for addressing these challenges. 

First regarding the outlook, I very much agree with what Senator Cardin said in terms of a broad range of supply factors—shale 

and gas revolution, new technologies brought supply line. As the 

Senator mentioned, geopolitical pressures on countries like Saudi 

Arabia to keep pumping are also playing a role. Weakness in demand is also very important part of it. 

My assessment of this is, while acknowledging the uncertainties 

surrounding the global outlook, energy markets are very high right 

now. It could take several years in the current environment to 

work off the kind of imbalances we now see in the markets. So certainly, I am comfortable with the view that says low oil prices are 

going to be persistent, if not permanent. 

Now these lower oil prices, in my view, were a small drag on 

U.S. growth last year, which is not the way it has been in history. 

But we saw a 40 percent drop in capital expenditure in the oil and 

gas sector, and that canceled the boost from higher consumer 

spending. 

One reason we had what I would consider a muted consumer response may have been the desire by many consumers to fix their 

balance sheets after the damage caused by the Great Recession. 

That is a healthy development. 

It also leaves one with some hope that as time goes on, consumers can become more willing to spend. Indeed, we could get 

that kind of more traditional relationship that lower oil is a net 

plus for U.S. growth. But right now, it is pretty much an offset. 

The main point here for today is the U.S. economy is not immune 

from oil-related turbulence abroad. Many of the emerging markets 

in turmoil share very close trade and financial linkages with us. 

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Stock market turmoil, as you know, in recent months has contributed to a tightening of financial conditions. I do think that one 

of the factors in the January selloff may have been sovereign 

wealth funds. These energy exporting countries selling off the assets, as Tim alluded to. And appreciation of the dollar along with 

lower oil is imparting an inflationary impulse to the economy. 

All this suggests U.S. policymakers are going to continue to need 

to be alert to the risks emanating from abroad. 

Now turning to the emerging markets, I do agree with Tim that 

there have been some important adjustments made in some countries, the beginning of reform efforts. But still, I would say, in 

broad terms, looking across the major exporters, 2015 was a year 

when adjustment was delayed, sovereign wealth funds were drawn 

down, infrastructure investment deferred, all in the hope that oil 

prices would return to previous highs. While that was understandable, I think it is only recently that many of the countries began 

to come to grips with the fact that oil is $30 a barrel and not $100. 

At that price, there is a historic gap between the market price 

on one hand and what we call the fiscal breakeven, the level of oil 

that really balances the books and allows the politics to be stable 

within these countries. 

What it suggests to me is that, in 2016, while there are still 

some parts of the oil-exporting world, particularly in the gulf where 

there are significant buffers and wealth fund balances that can be 

drawn on, in more and more countries, those buffers have been 

worked through, and muddling through is no longer a viable option. 

This worries me that there is the potential for disruptive adjustment, political and economic, in these countries in 2016. 

Now the economic playbook for reform is pretty straightforward. 

It involves moving energy prices to world market levels. Historically, these energy prices have been a distorting and overly generous part of the safety net. You need to target the safety net to 

those most in need and get the prices right. You need to get your 

exchange rate back to market levels, if you can. 

I believe the IMF can play a vital role in support of these efforts, 

reinforcing U.S. strategic interests in this area. There has been 

some very good work from the Fund the last couple years. I think 

they are getting it right in terms of the analysis. And they been 

making a big effort in recent months to reach out to countries like 

Nigeria to establish a dialogue ahead of the actual crisis. I think 

that is a good thing that we should support. 

In my report, I touch on a couple countries at risk. I am particularly worried about Iraq, as are others, where terrorist attacks and 

infrastructure weaknesses disrupted production and contributed to 

a 15 percent of GDP fiscal deficit, which is clearly not sustainable 

for very long. 

I have written in the past a fair amount about how in Russia 

poor policies, a long history of poor policies, low investment in energy, and sanctions, which I think are a powerful multiplier on 

those problems, have enacted a growing drag on the economy. 

Asset funds there are being diminished. It is not viable. And I do 

think there will be very tough political and economic choices made 

there over the next year. 

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Nigeria we have touched on. I do not think they have the buffers 

to deal with very large deficits that have emerged. They have 

turned to the World Bank for money, but I think they will need 

more. 

But I want to spend just a moment more on Venezuela, because 

I think of all the countries that are at risk, this is the one we need 

to be most focused on right now because Venezuela is an economy 

on the edge. They are descending into a deep and profound crisis 

reflected in severe shortages, hyperinflation, and collapse in economic activity. They have a widening financing gap, shrinking reserves, which probably are much less than they report they are. 

And the measures they took recently were woefully inadequate 

to deal with the imbalances that they now face. If the government 

responds by further compressing imports, popular support for the 

government can collapse very quickly. So in my view, a default and 

the chaos that would come after that is a question not of if but 

when. 

Now the current Government of Venezuela obviously is unlikely 

to seek help from international financial institutions or the U.S., 

and it will generally refuse cooperation with Western governments. 

But it is not too early to begin planning for a time when a future 

Venezuelan Government is willing to take the hard measures that 

warrant broad international support. 

That program is going to require very significant financing. It 

probably will require private debt restructuring and support for all 

official creditors. You have dealt with these issues in countries like 

Ukraine recently, and similarly, it will be in play there. 

China’s role is going to be critical here because they need to be 

a constructive partner with the IMF and of the United States as 

part of building an architecture for that ultimate rescue package, 

rather than be oppositional or outside of it, as we saw with Russia 

in the case of Ukraine. 

Now broadening back out and in conclusion, failure to address 

these imbalances will translate into crises much larger in scale and 

spill over in the United States and elsewhere in unexpected fashions. 

I think where there is a willingness to take tough measures, 

there are very important benefits to financing packages led by the 

IMF and supported by very strong market adjustments. Low energy prices are going to continue to generate global risks, and we 

need to be thinking ahead and ready to act when the opportunity 

presents itself. 

Thank you very much. 

[Dr. Kahn’s prepared statement is located on page 37 of this 

transcript.] 

The CHAIRMAN. Thank you both. 

Look, I certainly agree we need to pay a lot of attention in our 

own hemisphere, relative to instability. I know that will be focused 

on during this hearing, but the title of the hearing is, ‘‘Economic 

and Geopolitical Implications of Low Oil and Gas Prices.’’ Obviously, that is generated by the very comment you referred to of 

Senator Cardin’s, and that is excess supply. 

FOREI-42327 with DISTILLER

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I know both of you focused more on economic issues, but is there 

anything that you see about what is occurring with oil that you 

think should in any way affect U.S. policy toward the Middle East 

in general? 

Mr. ADAMS. The massive increase in U.S. oil production over the 

past 10 years has been phenomenal. There was a period in the 

1980s and 1990s where we were seen as having diminishing capacity to produce oil. Also remember that was a time we were also 

building LNG import facilities, and now we are one of the larger 

producers of gas, and are in the process of converting those into export facilities. So it gives us enormous independence. And it has 

been I think the real game changer with respect to supply characteristics, which you describe. Not only supply characteristics, but 

there was an article on Bloomberg this morning that noted that 

just working off the inventories that have accumulated over the 

past year, it may take years, maybe a decade. 

So I think the supply-demand imbalances, even if you fix them, 

the inventory levels are enormous. 

But I think it changes the public perspective about how we engage and the role that we play in the Middle East. I think we see 

that filtering into the political debate with respect to the current 

election cycle. 

Can we wean ourselves from our dependence on Middle Eastern 

oil? Although prices are set globally, so you are always subject to 

price swings. But can we wean ourselves and does that change our 

posture in the Middle East? And does it impact the way in which 

this committee and our government thinks about the U.S. role in 

that part of the world? 

The CHAIRMAN. Should it? 

Dr. KAHN. I think I would just add that the best thing we could 

probably do to provide stability in global energy markets is to support political stability in these regions, and strong economic policy. 

If you think about the Middle East, I think we have to be humble 

that we are in the midst of a 30-year political transition, which is 

stressing borders and governments, and it is creating strong domestic dynamics that are affecting the interests and willingness to 

provide oil or not provide oil. In some ways, we have to be cognizant of the fact there is probably relatively limited we can do in 

the short run, other than trying provide the conditions for political 

stability. 

I think Senator Cardin mentioned the Saudi-Iran dimension of 

this is typical but not alone in that regard, in the sense that from 

the Saudi perspective, low oil prices provide geopolitical advantages 

in terms of constraining Iranian ambitions in the area. If that is 

the view, that would be a compelling reason, besides the simple economics, that would influence decisions on providing oil. 

So I think at the end of day, political stability will drive economic 

stability, rather than the other way around. 

The CHAIRMAN. I am going to reserve the rest of my time for 

interjections and turn to Senator Cardin. 

Thank you. 

Senator CARDIN. Again, I thank both of you for your testimony. 

There is a lot in common in the countries that you mention that 

are fragile or more fragile today as a result of the reduction of oil 

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prices. These are countries that have serious corruption issues. 

They are not good governance countries. They are countries whose 

values are much different than our values. And they are countries 

that do not put a very high priority on innovation and creativity, 

and developing an alternative economy. 

Therefore, the historic term ‘‘resource curse’’ applies very clearly 

to these countries. And with lower oil prices, they are feeling the 

real effects of their dependency on an energy economy. 

It was interesting, the observations about the Saudis, that they 

may be doing this to reduce the influence of Iran in the region. One 

could argue that the reduced energy prices also reduce Russia’s influence in the region, although Russia certainly has not shown any 

propensity to slow its involvements in Ukraine or in Syria. 

But it also could have an impact against the priority for innovation for alternative and renewable energy sources. There have been 

at least some articles written that the Saudis may be doing this intentionally to deal with our shale oil issues, to keep the prices noncompetitive for development of additional fossil resources here in 

the United States. Some of us were at COP 21 in Paris, and we 

saw 196 nations come together to reduce our dependency on greenhouse gas emission energy sources. 

One of the more hopeful events that we attended was Secretary 

Moniz and the innovation exhibit he showed us. We got to see a 

car, Mr. Chairman, that was manufactured in your State with a 3D 

printer at the Oak Ridge National Lab. Fascinating, a 3D car. 

Shelby Cobra, just to give the name. 

In my own State of Maryland, we are working on oxide fuel cells 

with the University of Maryland, with private companies, and the 

Department of Energy. 

I mention that because one of the impacts of lower oil prices 

could be to slow down innovation for alternative renewable energy 

sources because of the pricing of gasoline being so cheap, why bother? With oil so cheap, you might as well use it more. So I think 

it is an issue that we need to look at. 

On the other side of that, as I pointed out, countries that are diversifying—India, for example—is showing a remarkable improvement in their economy because they are diversifying. China is 

reaching out to diversify their economy on renewables and sources. 

So if you could comment a little bit more as to whether the silver 

lining through all of this, alternative and renewable energy 

sources, less dependent upon oil or fossil fuels from countries that 

disagree with our way of life, whether the trend line as a result of 

lower prices will continue to be favorable towards the West or are 

we going to be held hostage now to low prices, making us more dependent upon fossil fuels? 

Dr. KAHN. A couple thoughts. I very much agree with you that 

to the extent we and others diversify to broader sources of energy, 

it provides a geopolitical as well as economic security. It was very 

much, for example, in the discussion with Europeans about sanctions on Russia, this was very much central in terms of our desire 

for the Europeans as well to move in the direction of alternative 

fuels and the like. 

I suppose the one other point I would add, and it speaks to this 

issue and also to Senator Corker’s earlier question, in terms of the 

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10 

argument that some have made that the Saudis, by keeping prices 

low for a period of time, can drive out some shale producers, can 

discourage the kind of very expensive high fixed-cost deepwater 

drilling that a lot of the other countries are doing, want to do. Then 

they can raise prices again. 

I understand the first part of the argument, but not so much the 

second. I think it is important to recognize that traditional model 

of a cartel that can have strong control over the market, I do not 

think it really speaks to the current environment. I think as we 

saw with the recent discussions of a number of countries, including 

the Russians and the Venezuelans over possibly just simply holding 

output to the very high levels we had in January, they were not 

really able to sustain that. 

So I think the sort of idea that Saudi can be the kind of swing 

producer that they had been historically I think very much is not 

so much the case. Now part of that, of course, is shale and the 

quick, rapid supply response we would see if prices went up again. 

So I do think that while it is certainly right to say you are going 

to get the substitution effects that you are describing, I think if the 

goal somehow is to have these kinds of monopoly effects, I think 

that is very much misguided in the current market. 

Mr. ADAMS. I would just add, if you look at a supply cost curve 

price, these levels certainly make renewables and shale and obviously deepwater uneconomical. The markets have figured it out. 

That is why many of these shale companies have funded themselves with high-yield debt that is blowing up the markets. There 

is enormous bank exposure, U.S. institutions, European institutions. 

There is article in one of the papers this morning that Canadian 

banks have $80 billion exposure to the energy sector, some of it because of the tar sands out in Alberta. 

But it is not as if that technology and those assets are going 

away. And fracking technology is getting better. It is getting cheaper. So that cost curve will shift over time. 

And I do not know the intentions of the Saudis, but I suspect it 

is a way to drive out everything above that cost curve out of business or mothball it. Some of it can come back quickly. I understand 

shale can be put back into production pretty quickly. Others, like 

deepwater, may take a decade. 

So I do believe it is having a profound effect on renewables and 

other sources of production. 

Senator CARDIN. Let me ask one additional question. You both I 

think mentioned the fact that the countries that are so dependent 

upon fossil fuels are going to go through a need for international 

intervention, at least seeking some help from the development 

banks and international support. Is it likely that these countries, 

such as Venezuela that has a poor record of governance, will be 

able to leverage the type of reforms on their energy sector and governmental sector where the international involvement will have a 

positive impact on the stability of that country moving forward? Is 

that realistic to expect that could happen? 

FOREI-42327 with DISTILLER

11 

Dr. KAHN. The track record is not particularly good in this regard, to be honest about that. I think we have to try. 

As I mentioned earlier, I do believe that distorted policies in the 

energy sectors in these countries is a source of corruption. It is one 

of the major sources of distortions of prices and misallocation of investment. 

So if they do turn to the West for help, if a rescue package is 

involved, really dramatically going after the sectors, getting prices 

to world levels, trying to get the incentives right, rooting out the 

corruption, I think you can build a lot of confidence and trust in 

that government. You can get the investment incentives right. 

I think you can make a huge difference. I think you have to try 

to do that. 

But it is hard to maintain popular support for what is very distorted. You have to get a safety net in place that really replaces 

these energy subsidies that have been there with a targeted safety 

net so that you really are helping the most in need. 

So I think we have learned a lot over the last years in countries 

that have struggled with this. I mentioned Ukraine is one that is 

struggling with this right now. So I think it is worth trying but you 

are absolutely right, it is a tough job, and it requires very strong 

political support for the government to be sustained during it. 

Senator CARDIN. I would just mention I think it is one area this 

committee may want to take a look at, Mr. Chairman, as we see 

the international organizations that we have jurisdiction over here, 

their involvement in this, absolutely we should be demanding that 

there be accountability for our participation. 

The CHAIRMAN. Thank you. Thank you very much. 

Senator Flake? 

Senator FLAKE. Thank you. Thank you for your testimony. 

Turning to Iran for a minute, Iran was expected to get a pretty 

big windfall with assets being released and being able to sell oil on 

the world market without restriction. How much has that been negated by low oil prices with regard to Iran? What is it going to 

mean to economic growth there in the next year or 2? 

Mr. ADAMS. Sure. It is only delayed. It has not really thwarted. 

There has been a tremendous amount of interest certainly from European officials and European institutions as well as Asian institutions to provide capital expenditures, capital equipment and infrastructure to Iranians, which now have access to hundreds of billions of capital to spend. I am sure governments are willing to, in 

Europe and Asia, to provide appropriate financing for infrastructure spending. 

So I think what we will see and will probably drive growth—our 

own estimates for Iran is that we will see growth jump to about 

5 percent this year, simply because of the massive amount of investments that are going to go into what is a fairly diversified 

economy, but a massive amount of investment that will go into the 

hydrocarbon infrastructure that will be sold and financed from a 

variety of places around the world. 

FOREI-42327 with DISTILLER

12 

So debt production is coming back on. It is coming on pretty 

quickly. I would say in a matter of years, we are back to pre-sanctions production levels. Some of that is now being priced into the 

markets. 

But I would say that it has only slowed. It has not stopped. 

There is a gold rush into Iran to sell and be a part of the renewal 

of that economy. 

Senator FLAKE. Mr. Kahn, do you agree? 

Dr. KAHN. I agree. 

Senator FLAKE. All right. 

Turning to Angola for a minute, a country like Angola that has 

had problems and has relied on higher oil prices to fund its activities, its governmental activities and a world of corruption there as 

well, what does this mean to Angola, these prices? 

Mr. ADAMS. My estimates are, first of all, the oil accounts for 

two-thirds of government revenues and 95 percent of their exports, 

and they have enormous exposure to China. So it is not only oil exposure but it is exposure to the cyclical changes in China. Heavy 

government borrowing. GDP has doubled over the last couple 

years, but we see a massive shift in their current account deficit, 

about 8 percent of GDP. They are drawing down their reserves. 

They are borrowing in capital markets. 

In fact, we expect external borrowing to hit $31 billion. 

Economic growth will slow to about 3 percent, so down about half 

the pace of growth prior to the drop in oil prices. The annual budget deficit is about 6 percent of GDP, and inflation is running about 

14 percent. 

They have general elections in 2017, but the current President 

has been in power for 37 years, so it is not clear what general elections actually mean. 

Senator FLAKE. It will mean more probably to a country like Nigeria that just went through elections and turned in the right direction, as far as we are concerned. If oil stays below $50 a barrel 

for another year or 2, what are we looking at in Nigeria? 

Dr. KAHN. As a segue, I think in Angola, when you see this type 

of spending, unsustainable buildup of debt, an election well into the 

future, it is a recipe for too little, too late, in terms of policy adjustment, and a crisis at a future date. I get very worried when I see 

that type of debt accumulation, that it is going to the wrong places. 

I think in some ways that is a bit of the legacy of Nigeria. Nigeria, to its credit, I think had made in past years some significant 

reforms and efforts to really diversify away from energy. Other 

know this, but my sense is that they deserved credit for that. There 

were elements of good economic management within that. 

But it was a fragile stability, and I think what we have seen 

with the recent run-up in the deficits and the like, that despite cutting government investment, you are seeing a real squeeze on the 

private sector in Nigeria. I think that is a real concern that the 

kind of gains that we saw would be lost over time. 

Obviously, if we get into a situation where this government has 

to start cutting social spending in the context of these deficits, it 

could be really destabilizing, quite destabilizing politically. That 

would be a concern of mine. 

FOREI-42327 with DISTILLER

13 

And traditionally, I have been worried about the Nigerians being 

too late to come to the international community and ask for help. 

In that regard, I welcome the fact that they went to the World 

Bank for support and advice. There was a technical mission with 

the IMF. There is still a big stigma there for this government with 

asking the IMF explicitly for help. But my expectation is that is 

going to have to change. 

Mr. ADAMS. I probably am a little more optimistic. Nigeria has 

enormous infrastructure problems. If you have ever driven from 

downtown hotels to the Lagos airport, in the 4 hours that trek 

takes, you know the needs for infrastructure. 

The Buhari government has certainly said all the right things. 

They have a cabinet in place. I am hopeful that they will be able 

to follow through on reform of the petroleum industry, greater 

transparency. As we all know, there has been an enormous amount 

of leakage, no pun intended, with respect to the way in which oil 

revenues have been allocated. 

They do have plans for an enormous amount of infrastructure, 

which the country desperately needs. They are a diversified economy—agriculture, services, construction. It is quite vibrant. 

There are still distortions. They are limiting access to dollars in 

an effort to try to create sort of an import substitution policy, forcing locals to buy locally. If you are a businessman and you are a 

manufacturer trying to import spare parts, you cannot get access 

to dollars to do that. It takes some time before domestic industry 

pops out. If you wanted Colgate toothpaste in Lagos, it is really 

hard. You have to buy the local brand, which is fine. 

But I am actually optimistic. I think for the first time in decades, 

that country at least has the right political leadership in place, and 

the capacity to be a player. And let us hope they are. They have 

180 million people in that country. By 2050, they will have 400 million. Their population will exceed that of the United States. 

So we should invest some time and energy into that country and 

make sure they get it right. 

Senator FLAKE. Thanks. I do not have time but I was going to 

ask, when we were in Mozambique, myself and Senator Cardin, 

and they are counting on large offshore natural gas production 

coming online in about 3 or 4 years. If we get a second round of 

questions, I would love to talk about that. 

The CHAIRMAN. Before turning to Senator Menendez, I think 

both my words and my actions have demonstrated I am no fan of 

Iran. But if you look at their debt-to-GDP numbers, it has been fascinating that during this period of incredible sanctions, they have 

managed to keep debt-to-GDP low while we have been feckless on 

both sides of the aisle and allowed our Nation to become incredibly 

weak. It has been fascinating to watch. 

But with that, Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Before I turn to the subject at hand, I just want to recognize that 

the U.N. just passed the toughest sanctions against North Korea 

in 20 years. And I appreciate the leadership of this committee, both 

you and the ranking member, and the work that we did with Senator Gardner, to lead on this issue. 

FOREI-42327 with DISTILLER

14 

I think there are moments that, when we lead, we gather the 

world’s attention and we focus it. Today, is a good example of that, 

so I wanted to just note that. 

Thank you both for your testimony. 

Mr. Adams, thank you for sending it in advance. I read it, and 

it did not provide for a lot of optimism at the end of the day. But 

I appreciate the insights. 

Certainly, while the precipitous decline in oil prices has benefited 

oil-importing economies by raising household disposable income, by 

lowering inflation, by increasing market competitiveness for products producing these economies, that same decline in prices has put 

oil-exporting countries under significant pressure, particularly 

those exporting countries that either lack the foresight or capacity 

to diversify their economies. 

So for these countries, loss of oil-related revenues and oil-related 

economic activity can be catastrophic. I want to talk about that a 

little bit with you. 

But in one sense, that should not be a surprise. Countries that 

have depended on revenue from oil as it is almost singular source 

is vulnerable to its price. And the more they are dependent, the 

more they are impacted. 

Mr. Kahn, thank you for your testimony. Now, from a foreign 

policy perspective, it strikes me that low oil prices might be a forcing function for economic diversification, but this is not the first 

downturn that many of these vulnerable countries have endured. 

So do you see opportunities here? As we were talking, and I totally agree with Senator Cardin vis-a-vis Venezuela, which this 

committee has had actions on, I would think international financial 

institutions would be advocating in these more vulnerable countries because of their dependency on oil for policies in support of 

economic diversification. 

Is that something that you see as an opportunity to happen? 

Dr. KAHN. I do think it is an opportunity. I think as one of these 

countries respond to a decline in prices promptly with an economic 

adjustment program, the sort I talk about my testimony, the sovereign wealth funds can provide a buffer to allow for that adjustment to take place because these things do take time. And I think 

it could be hugely positive in terms of long-term growth potential. 

It can be a forcing event to get rid of these very distortive subsidies. 

But I think the honest reality is that in many cases there are 

strong political incentives for these countries to kind of delay, to 

convince themselves that prices will come back up, that the deals 

that have to be cut to live with lower oil prices within the country 

are too difficult, and to not be willing to talk to the international 

community until it is really quite late in the game. 

Senator MENENDEZ. Is that then the leverage moment for these 

international financial institutions, because they may not want to 

do that and may be recalcitrant because of their expectations that 

prices will rise, and they will not have to change their operating. 

But it seems to me that is the moment that the international financial institutions should leverage to try to get them to do so. 

FOREI-42327 with DISTILLER

15 

Dr. KAHN. It is what they should be doing. And to give them 

credit, I think the IMF is making a real effort right now to get out 

to the oil exporters and to have exactly this kind of conversation 

with them. 

There have been these press reports of noticeable successes with 

Nigeria, whose Uzbekistan, Kazakhstan, and a few other the countries. 

But I think there is still a stigma to coming to the IMF. Sometimes there are legitimate concerns in these countries that to do so 

almost is a signal to their private sectors that things are worse 

than they seem. 

So certainly, to the extent the international community, the G– 

20, including G–20, which Tim can talk to, can try and find ways 

in which to facilitate these discussions, it is all for the good. 

Senator MENENDEZ. Now in the context of a flipside of this, in 

terms of our use of peaceful diplomacy tools, sometimes when we 

cannot get countries to observe the international order and are impervious sometimes to international opinion sufficiently and criticism to get them to move in a different way, and our use of our 

aid and our trade has not induced them to move in a better direction, sometimes we turn to sanctions as a peaceful tool of international efforts. 

So I think about Russia, Ukraine, Crimea. I think about Iran 

and its nuclear program. But beyond its nuclear program, what 

they are doing with the Houthis in Yemen, what they are doing in 

Syria, what they are doing in the expansion of intercontinental ballistic missile technology. I say to myself, obviously, the precipitous 

drop of oil has a multiplying factor in those economies. I think that 

is a fair statement. While sanctions are existing, there is a multiplying factor. 

I offer this question to either one of you or both. Do you see a 

point—I think maybe it was you, Dr. Kahn, that called it a fiscal 

breakeven price at which Russia finds itself unable to sustain its 

foreign policy. Is there a point at which the Iranian regime might 

be unable to sustain policies for support for Assad, Shia militias in 

Iraq, the Houthi insurgency in Yemen, the financing of billions of 

dollars to Hezbollah and Hamas? 

And in Venezuela, which has another challenge to one internally, 

but it has been giving free oil or largely subsidized oil to countries 

throughout the hemisphere. That has an even bigger ripple effect 

at the end of the day. 

So could either or both of you talk to us in that regard? How you 

see when it is that they can no longer continue, that they are going 

to have to alter, because of fiscal realities, some of those policies? 

Mr. ADAMS. We have with us and we can submit for the record 

current breakeven fiscal points (See Table 1 below). As the spectrum goes, Iran is pretty close to the bottom. Our latest estimates 

are about $72 a barrel for Brent, and in many countries it is coming down simply because the fiscal adjustments they are putting in 

place. 

FOREI-42327 with DISTILLER

16 

TABLE 1. 

So some of them have been quite large, over $110, $120 a barrel, 

and have been going up over at the last few years, from about 2000 

up until about 2012 because of the spending sprees that went on 

in many of these countries. But they are starting to see adjustment. 

I think we are a long way from creating that kind of pain, especially in Russia, although they are going through their reserves 

pretty quickly. By the end of 2016, there will be maybe $15 billion 

left in their reserve fund. As you get into 2017 and a new election 

cycle, they will be forced to take even further measures. They have 

been walling off military expenditures and focused most of their 

cuts on social programs and investment. At a certain point, they 

will have to rethink that mix. 

But I want to go back to your point about diversification. The 

best job in the consulting business now is to have an account in 

Riyad. The airplanes out of Dubai into Riyad are full of contractors 

trying to sell diversification. The Deputy Crown Prince Mohammed 

bin Salman, who is actually doing a tour of the U.S. soon, is leading that effort to try to diversify the Saudi economy. 

I think they are very serious about it, and I think they have the 

resources to put behind it. They see what is happening with the 

UAE, which has diversified, and Oman as well. 

But all of these countries to varying degrees are being forced to 

put in place appropriate adjustments. Some is by design. Some of 

FOREI-42327 with DISTILLER

17 

it is well thought out. Some is haphazard. Some of it will be done 

recklessly. 

But Iran I think is not one I worry about in the short term. And 

I think Russia has enormous durability to withstand these prices 

for some period of time. 

Dr. KAHN. Let me pick up on the Russia point, because I think 

it illustrates some of these trade-offs. 

The fiscal breakeven is a static concept. It sort of saying, right 

now, with the policies we have in place, what is the price we need 

to make things balance. So for Russia, they are hemorrhaging 

money at this point. Now they have large asset balances they can 

draw down, and, of course, in the gulf as well, they can do this for 

some time. 

So certainly, you can try to calculate how long they last. A lot 

of these sovereign wealth funds, including Russia, is not fully 

transparent, how much is there, how much is liquid and usable. Of 

course, the politics of whether it can be used can be an issue as 

well. 

But then as you get lower, then you have to ask, well, what are 

the next policy steps you can do? Is it cutting investment? 

One of the things we see in Russia, which I think is indicative 

of other oil expect exporters but it is particularly an issue in Russia, is that if you have a country where the majority of their export 

revenue and budgetary revenue comes from oil, so the budget is in 

domestic currency, in rubles, in this case, oil is sold dollars, a devaluation helps the budget. So if you say put together a budget in 

the fall, assuming $55 a barrel, that is as much a political statement as much as an economic judgment. It is saying we are going 

to try to balance interests and put together a budget that maintains our politics at this price, and allocating resources for the military, for social spending, and for the like. 

Then prices are $30. What do you do about it? You can renegotiate. We saw that in Saudi Arabia in some sense, announcements 

about changes to the safety net, which in a sense was recalibrating 

the budget to a lower price. That is one way to close the gap. 

In Russia, easing monetary policy by depreciating the exchange 

rate and raising the domestic value of that oil revenue shifts 

money to the budget. It is a way of easing those pressure points. 

Now where does that money come from? It is a tax on consumers, 

particularly those with fixed income. 

So that is a common kind of element in many of these countries, 

particularly those that do not have pegged rates. In the gulf, there 

are a lot of peg rates and changing it would be very disruptive. But 

where countries have flexible rates, that is one element of the dimension that feeds into the politics very readily, because it is a 

shift of resources. 

The CHAIRMAN. This has been a great explanation, but we are 

probably going to end it. Thank you. 

Senator Gardner? 

Senator GARDNER. Thank you, Mr. Chairman. Thank you for 

holding this hearing. 

And thank you to the witnesses for being here today. I too want 

to echo Senator Menendez’s comments on North Korea. The resoluFOREI-42327 with DISTILLER

18 

tion out of the United Nations reflected much of the language and 

the work that we had done here in our sanctions on North Korea. 

Obviously, one of the areas where they did not go as far as we 

did was on the issue of cyber sanctions. I hope that we can continue to work with our partners at the United Nations to continue 

to look at cyber activities and sanction activities that follow from 

the cyberattack out of North Korea and beyond, particularly as it 

relates to perhaps North Korean activities through China and others. 

So congratulations again on a very good resolution out of the 

United Nations. So thank you. 

To the witnesses today, one of the things that I think you have 

touched on a little bit here, and we are seeing more and more in 

the news, just yesterday, Moody’s Investors Service I guess on 

Wednesday, 14 hours ago, so just today, Moody’s Investors Service 

lowered the outlook on China’s credit rating from stable to negative, citing a weakening of fiscal metrics and continuing falling foreign-exchange reserves. 

We see headlines where China is to lay off 5 million to 6 million workers and earmarks $23 billion to help pay for those layoffs in 

steel sectors and other sector sectors. 

What does this mean for the price of oil? If they are shedding 5 

million to 6 million people here, what does this mean as more layoffs are coming as anticipated in industrial sectors in China? And 

how does that affect the outlook for our oil price? 

Mr. ADAMS. Sure. There are two elements at work here with 

China. I was just in China. I just got back 24 hours ago. 

There is a structural shift that is going on in the nature of the 

composition of growth, from smokestack, heavy industry to services 

and more high-tech. So that is impacting the nature and volumes 

of imports, and we are seeing that whether it is iron ore exports 

from Australia or copper from Chile. 

So there are structural shifts going on, which we have been applauding, because we said that they need to change the nature of 

growth. The structural growth they had in place was not sustainable. That is part of the explanation of why we have seen a slowing 

in growth. 

And there is a cyclical component on top of that, which is magnifying the structural. In fact, we are seeing a substantial slowdown. 

The official statistics are somewhere between 6.5 percent and 7.5 

percent. I think it is something below that. So certainly, on a nominal basis, it is substantially below. 

Senator GARDNER. Below as in 5 percent or 6 percent? Or 8 percent or 9 percent? 

Mr. ADAMS. Personally, I think it is probably in the 5 percent 

range. Who knows? It is a large economy and the statistics are of 

questionable nature. 

But we do see substantial reforms. For example, there is enormous overcapacity in many smokestack industries, whether it is 

aluminum smelting or steel production. And they have been supporting those industries for a long time, either through state-owned 

enterprises or cheap capital from the financial system. They ought 

to be shutting those things down, in fact, because it has been flooding the world with excess capacity and depressing prices. The ChiFOREI-42327 with DISTILLER

19 

nese have been exporting deflationary pressures for years, and they 

see it even in their own domestic prices. 

So in some ways, the shutting down of those factories I think is 

good because they are not economical in globally competitive terms. 

But China is slowing structurally. It is slowing cyclically, and 

will continue to have a profound impact on commodity prices generally. They are the price-setter at the margin. So how goes China 

goes Chile, Angola, Australia. The rippling effects go throughout 

the global economy. 

Senator GARDNER. So as we see these layoffs continue and the 

shuddering of factories and this growth decline that you talk about, 

what does that mean for projected price, oil supply and demand, in 

the future? 

Mr. ADAMS. Well, if you look at real volumes of Chinese import 

of oil, it is actually up. It has plateaued a bit. 

I think the biggest driver of oil prices has been the change in the 

supply. It has been in the U.S. because our production has gone up 

substantially because of unconventional production. So it is both 

the supply and demand, but China was a driver both perceptually 

and in real terms for many, many years. And I think demand will 

soften there. 

But the perception is that somehow volumes have plummeted. 

They have not. In fact, 2016 will actually see positive increase in 

oil consumption and imports in China from 2015. It is just not at 

the same pace. And the supply characteristics of global markets 

have changed dramatically, and we have enormous inventory sitting around, too. 

Senator GARDNER. So if you look at the prices where we are at 

today, just looking at the United States, the prices we are at today, 

see where they came down to. The last time when it dropped down 

to about $27 a barrel I think was about 12 years or so ago, the lowest price in 12 years. 

What was our economic growth as a result of that decline in gas 

prices say 12 to 15 years ago? I guess the question is, when you 

see a significant percentage decrease in the price of oil, what did 

that do for our economy, if there is any sort of comparable time 

frame for a percentage drop in the price of oil? 

Dr. KAHN. So if you look at the historical models, look at, say, 

the performance of the U.S. economy in the 1970s, it would have 

predicted for you that the decline in oil on this order of magnitude 

would have had a material positive effect on U.S. growth because 

of the consumption benefits that would have come from lower oil 

prices, from filling up our tanks, and we would go and spend that. 

What is striking is that we did not see that this time. In some 

sense, it is an easy answer that the countervailing effect was a 

very material drop in investment in oil and gas sector, because we 

have just a much bigger presence because of the development of 

shale. 

So the models now updated basically show either very small 

positives or very small negatives from this shock that we have had 

so far. Last year, I think most of the things I read say a small negative, actually, for growth. That is unusual. 

My hope is this year, that will swing to positive, because consumers that to some extent were still fixing their balance sheets 

FOREI-42327 with DISTILLER

20 

after the Great Recession, the damage, are going to feel better 

about spending this year than last. You are not going to have the 

same decline in investment. You will not have 40 percent every 

year. 

So, on balance, I do think over time, if the low oil price persists, 

it will become more positive. But that is a projection, and we are 

in a new world because of the greater role of energy production. 

Mr. ADAMS. It has been enormously lagging. The auto sector certainly has benefited. If you are selling SUVs, you have certainly 

benefited. But households save more than our models told us because I think they were still repairing their balance sheets. 

Senator GARDNER. You do some expansion, obviously sales in 

SUVs and other autos. I think you see airline reports of record 

profits. But the sort of dividend of this low price to the consumer 

has not necessarily resulted in same kind of reaction from a consumer investment as it did in the 1970s. Would you agree with 

that? Or could have in the 1970s? 

Mr. ADAMS. It has not achieved what the standard models will 

tell you. I think if you were to get some of the Federal Reserve 

Governors here in front of you, they would also say it has underperformed their own expectations for what it would have done to 

demand, where we are in the cycle. It may just be a lagged effect, 

and we will see more of it filter through in 2016 than we did in 

2015. 

Senator GARDNER. Thank you. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Before turning to Senator Kaine, I want to thank you and Senator Menendez again, and the entire committee for its efforts on 

North Korea. I really do think it had an impact on pushing China 

and Russia at the Security Council to take action. Again, if it is implemented properly and held to, it could make a significant difference. So again, I want to thank everybody on the committee for 

their contributions and the results that occurred. 

Senator Kaine? 

Senator KAINE. Thank you, Mr. Chairman. Thanks for doing this 

hearing. This really opens up a lot of discussion I know we will be 

having. 

And I appreciate the witnesses for the testimony. 

I was in Israel once when I was Governor in 2009, and met with 

Shimon Peres. I asked him just kind of the open-ended question, 

sort of at the end of our discussion, what would be something we 

could do in American policy that would really benefit Israel, the 

U.S.-Israel relationship? He kind of cryptically said, wean away 

from your dependence on oil from the Middle East. He did not really describe kind of why he viewed that as his top ask. I thought 

he was going to ask about a defense MOU or something like that. 

But in his way, as a very philosophical thinker, that is what he 

put out there. As I thought about it, he was sort of saying, look, 

the more you develop your own energy sources and reduce demand 

on energy from here, or the more you move into noncarbon energy 

and reduce demand, the more you increase supply, if you engage 

in activities in the United States that will depress prices, there is 

less money going into bellicose economies that want to use extra 

FOREI-42327 with DISTILLER

21 

dollars to engage in adventurism in the region. I think that is kind 

of what he was saying. 

It has been a remarkable stretch from 2009 to today in terms of 

that happening. In some, I think there were policies that drove it. 

And in others, just good old American ingenuity, sometimes in 

spite of Congress and in spite of policies. 

But nothing is completely good. So I love paying 20 bucks or less 

to fill up my car. I have not been in that position for a long time. 

But you have pointed out a number of the ways where there is both 

a good side and a downside. 

We deal with a lot of these petro-dictatorships that have been 

able to prop up their economies because of high oil prices. Paul Collier and other writers talk about the kind of resource curse. There 

are corruption issues that often come from it. But also oil revenues 

have had a way of buying off opposition as well. 

I think a lot of what we deal with in this committee is, when we 

are dealing with challenged relationships, what is the best way to 

influence behavior. 

It is interesting with the sanctions discussions that we have had 

here, we have had sanctions discussions about Iran, about Russia, 

about Venezuela, about North Korea. Three of those nations are 

nations that lean very heavily on petrochemicals and on oil. And 

all of them are pretty significantly affected in a low-energy price 

economy. 

It has been interesting, Mr. Chairman, sitting here in the discussions we have had about sanctions. I think the balance that we are 

always trying to strike is, sanctioning bad behavior is important, 

but we do not want to let a dictator use our sanction as a way to 

crush internal political opposition. 

Ultimately internal political change, political stability, is what 

we are after. If a dictator mismanages an economy, as was the case 

with Chavez and Maduro in Venezuela, or Putin in Russia, there 

will be angst that will develop politically that will demand change. 

But if the dictator can blame it on, ‘‘Congress is sanctioning us. 

You are suffering because of the United States Congress.’’ If they 

can blame somebody else, they are going to do that. 

So we often have to really use the sanctions tool in a very fine 

way and not allow our sanctions to mask the mismanagement of 

economies by dictators who do not know what they are doing and 

are not diversifying the economy, because if we allow it to be 

masked, then we can sometimes suppress the growth of a political 

opposition. 

We are seeing some strong elections in Venezuela, some positive 

elections, at least somewhat positive, in Iran. We have not yet seen 

the internal political opposition develop in Russia that we would 

want. There certainly is development of political opposition that we 

can see in North Korea. 

But the low oil price thing really factors into our own calculation 

of when and how to use the sanctions tool. So I just find this to 

be very fascinating. 

I just want to ask one question about your thoughts about Russia. Low oil prices, if I go back to kind of the Shimon Peres thinking, low oil prices would hurt Russia in the sense of less dollars to 

engage in adventurism. But there is also a little bit of sense with 

FOREI-42327 with DISTILLER

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Russia that they engage in adventurism to take their people’s eye 

off the ball. If the economy is hurting and if people are suffering, 

then let us have a winter Olympics or a World Cup or let us invade 

a country to try to take everybody’s eye off the ball. 

As I talked to some of our European counterparts, even more 

than an aggressive Russia with money, they kind of almost worry 

even more about a basket case Russia in terms of what that would 

then produce in Eastern Europe, in countries that border. 

So talk a little bit about, if we see low oil prices staying for a 

while, and I know that is a big if, but if we see them relatively low 

and maybe less volatile, how would you see that playing into kind 

Russian politics and the prospect for adventurism by a Putin who 

has sometimes used extraterritorial activity to turn people’s attention away from their own political dissatisfaction? 

Dr. KAHN. That is, of course, an extraordinarily hard one to predict. Anybody who tells me they know Putin’s mind, immediately 

I am careful. 

You are absolutely right to say that the history of sanctions is, 

indeed, that particularly when sanctions are against traditional enemies, there can be a rallying around the leader and that can 

strengthen them at least initially. But it does not usually last. It 

wears over time, so you have to recalibrate your sanctions and be 

aware of how long it is going to take. 

But also, there is this risk that you cite. Several of my colleagues 

at CFR have been very concerned about that idea that a Russia 

that is running out of money and that can no longer broker the 

deals that underpin the current government could look abroad for 

ways to continue to distract. Certainly, that is a concern in the Baltics and a concern elsewhere in the region. 

I guess I would only argue that ultimately the people that support this government are paying a huge price. It is a huge tax to 

inflation on people with pensions and fixed income. And I am not 

a political scientist, I am an economist looking at it, but what I can 

tell you is that those costs are mounting, that sanctions are a multiplier on these low oil—and a history of really bad policies and 

really difficult demographics and a lot of other factors that are 

coming together, and that the economic outlook for Russia is really 

extraordinarily poor. And that is avoidable, in some sense. 

So I really would hope that there would be a political argument 

that would get some traction within Russia that the answer is not 

adventurism but rather accommodation with the West. 

Senator KAINE. Mr. Chair, can I have Mr. Adams try a quick answer. That is the only question I have. 

The CHAIRMAN. Sure. 

Mr. ADAMS. Parliamentary elections this year, presidential election cycle back in 2018, as I said, they have cordoned off military 

expenditures. That really put domestic discretionary spending 

through the ringer. They have cut education spending, health care. 

But the President remains incredibly popular in spite of these 

changes. In my last trip to Moscow, it was sobering in the sense 

that he was blaming the outsiders and sanctions for all the problems. 

There is a wariness on behalf of foreign investors to invest. I just 

received a phone call last night from a large U.S. investor who said 

FOREI-42327 with DISTILLER

23 

the Russian authorities were sounding out pricing euro bond 

issuance and U.S. investors are saying we do not want any part of 

this. U.S. institutions have pulled out. Financial institutions are 

very wary of going in. Even European institutions are questionable. 

So they are going to have a tough time tapping global capital 

markets. And they are blowing through the reserves pretty quickly. 

At some point, 2017, 2018, if dynamics do not change, then they 

have to change. 

To Rob’s point, they can benefit by cheapening currency with 

higher domestic inflation and putting the burden on their people. 

But with 2018 elections coming up for the President, I expect they 

are going to try to find ways to avoid as much pain as possible, and 

they will continue to blame outsiders. 

The CHAIRMAN. On that same topic, I will use 30 seconds of my 

reserve time. In the Middle East, sectarian divide and tensions 

have to be increasing with the lack of budget authority and issues 

that they are dealing with. We all have folks coming in to see us. 

And I know the Kurds have been in recently relative to their budgetary issues. 

But you also wonder about adventurism there or fabricated conflict to just create the appearance and then the reality of instability 

to drive prices there, because at some point in time—you look at 

Iraq right now, it is totally, hugely underwater because of what is 

happening. I am not saying they would do that, but in the region 

with huge pressures, I wonder about the same type of thing occurring there. 

Senator Murphy? 

Senator MURPHY. Thank you very much, Mr. Chairman. 

I think it was in 2013, Senator McCain and I had the extraordinary and fairly wild experience of sitting with President 

Yanukovych in Ukraine the night before he was to announce his 

new gas deal with the Russians at a pretty severe discount, which 

ended up being one of the precipitating factors of his government’s 

fall. 

But it was, of course, evidence of some of the other kind of adventurism that Russia takes advantage of in the region, not just 

moving military assets around but using its energy largess to substantially discount arrangements with governments that then have 

to pledge some degree of fealty to them. 

There has been evidence in the last 2 months that Russia’s capacity to continue to extend its energy tentacles out into the region 

is being substantially curtailed. Two pipeline tenders were canceled, one in December to China, I think, and another in January. 

I guess I just sort of extend Senator Kaine’s question to ask 

whether those are signs that already decisions are being made because of limited resources to cancel some of these projects that 

would have potentially extended their energy reach or whether that 

is simply a question of this lack of access to financing that you referenced? Are we already seeing some substantial inability to extend energy projects that maybe suggest already a conversation 

about how this adventurism starts to get rolled back? 

Mr. ADAMS. Yes, Senator, that is exactly the case. We are seeing 

a Russian oil production infrastructure that is pretty dated, and it 

desperately needs investment. That investment has been curtailed. 

FOREI-42327 with DISTILLER

24 

And the longer it is curtailed, it certainly limits their capacity, not 

only for domestic production but to tie into other systems. And because of lack of international financing through capital markets 

and the lack of their own domestic investment resources, and the 

sanctions themselves, just getting oilfield equipment into the country has become a problem. So sanctions in that respect are biting, 

without question. 

Dr. KAHN. What we have learned is that one of the interesting 

ways financial sanctions, when they are combined with the sectoral 

sanctions we have in place in Russia, is it creates a lot of uncertainty that really is a weight on long-term investment, in that 

there is a de-risking process that goes on. That is part of the power 

of the sanctions, is that if you get caught on the wrong side of these 

things, there can be huge brand penalties and financial penalties 

that some banks have found for violating sanctions and the like. 

I think that is persistent. It is something that grows over time. 

I think we are seeing it. 

So for example, on the bond deal that Tim mentioned, it is not 

explicitly ruled out by the sanctions for U.S. banks to participate. 

But after consultations, it became very clear for all the U.S. institutions, this was not really worth it because of the risk to the 

brand but also the risk that if you make a mistake, the costs are 

extraordinary. 

For better or for worse, that is part of the way the new sanctions 

that we have developed are working. 

I think that is not something that you can turn around in a day, 

in some sense. If I were managing a large bank, I would be very 

cautious about re-engaging. 

Senator MURPHY. You have painted a picture in which in 2016 

Russia will have very limited choices with which to continue to 

keep the operation going. You have hinted at something that we all 

understand, which is that if you move forward with the valuation 

and pass the costs of that along to the Russian economy and to citizens, there is a major political risk to that. 

So let us say that Putin makes a calculation that that just simply is not worth it. If that is the case, can he continue to wall off 

military expenditures in the way that both of you have referred to? 

Or is that a natural next step, if he chooses not to move forward 

with some substantial devaluation? 

Mr. ADAMS. It is a natural next step, but I would hazard a guess 

about the timing. Our friends across the pond probably have a better perspective of what that looks like than I could give you. 

Senator MURPHY. Let me just switch topics. I want to talk a little 

bit about the future of the shale exploration. 

So in Connecticut, we have these two casinos, and they built up 

over years and years and years under the expectation that there 

was never going to be another casino their shape or size in the region. They made some big investments that paid off for a long period of time. Then, lo and behold, the politics changed in surrounding States, and casinos started to pop up, and their investments started to become very problematic for them. They will figure it out, but it feels a little bit to me like the shale discussion 

today, which is that we made a big bet on shale and gas and oil 

here. It is paying off for us in spades today. We seem to kind of 

FOREI-42327 with DISTILLER

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expect that either politics or technology is going to keep us in an 

advantaged position for a very, very long time, and there is nothing 

to stop Europeans are others who may have political problems from 

starting to get over those, nor eventually is there anything to stop 

the technology that may not be available to other countries to eventually find their way there. Maybe the sanctions today stop Russia 

from getting access to that technology. We cannot assume that is 

permanent. 

So what is the likelihood that this revolution expands in meaningful ways to other parts of the world? What are the consequences 

to the U.S. economy of our bounty being shared in a way that it 

is today? 

You had this very interesting point, which is that maybe the reason for a lack of immediate economic expansion based on low oil 

prices is in part because of the big play we made. 

What happens if all of a sudden that is not a U.S. play any 

longer. That is a much more global play? 

Mr. ADAMS. I am not an oil expert, but it is my understanding 

that a lot of the shale properties that are no longer financially viable because they issued high-yield debt that is blowing up or the 

banks are calling their loans, those assets are being redeployed. 

There are a lot of firms in Texas, other oil companies, who are buying those resources with the view that over the medium- to longterm, prices will come back and those fields will be economical once 

again. The technology continues to improve and prices on production continue to drop. 

The world is awash with places in which that technology can be 

exploited—China, for example, in the northwest part of the country 

has enormous shale deposits. There is no water there, so the technology has to continue to evolve, since you need water for fracking. 

But as the technology has evolved, there is enormous opportunity. 

It is the politics in Europe that really keep it from happening 

now. But in Poland and a whole host of other places in Central and 

Eastern Europe, there are great shale deposits. 

So once the technology is available, it is available globally. Firms 

that cannot sell it domestically will be selling it globally. 

I think it has been a game changer, and it was a game changer 

that was done by entrepreneurs and visionaries and small firms 

employing technology. It really was not the majors that did it. So 

I think it is a great U.S. story, but it is one that is not contained 

in the U.S. 

Senator MURPHY. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Senator Shaheen? 

Senator SHAHEEN. Thank you. 

Thank you both for being here. I am sorry that I have missed 

some of the discussion today, so if you have already discussed some 

of these issues that I am going to raise, please forgive me. 

There has been a fair amount of discussion about the Russian influence and Russia’s use of energy to influence actions in Eastern 

Europe and in Europe in general. I want to talk about the opposite 

side of that, which is what Europe can do while we have this period 

of declining oil prices and the sanctions on Russia that limit some 

FOREI-42327 with DISTILLER

26 

of its investments, what Europe is doing to look at future energy 

sources for Europe. 

Dr. Kahn, you were at our subcommittee hearing on Greece last 

year, and I think we talked about Greece and the pipeline that is 

being permitted across the middle of Greece, which would provide 

for some spurs that would help Eastern Europe as they are looking 

at energy. Can you and Mr. Adams talk a little bit about what you 

see happening in Europe to get out ahead of what happens at the 

end of these low oil prices? 

Dr. KAHN. I think you summarized it very well. Obviously, the 

politics of diversification in Europe are fraught, particularly in 

areas like nuclear but also on shale and the like. So it is a difficult 

debate, even for a single country to resolve. 

Now we have a Europe that is strained by a migration crisis and 

other governance issues, much less the Greek issue, which we may 

need to revisit at some point, our conversation. To do the kinds of 

things that we think they should do is going to be hard in this current environment. 

But that said, diversification has got to be strongly stabilizing 

from a geopolitical perspective. You cannot be dependent on these 

single pipelines that can be turned on and off as an element of political negotiation. 

Then I would just add, on Ukraine, obviously, there are legitimate concerns in Europe about the pace of reform in Ukraine right 

now, the government debate that has gone on there, which is very 

messy, and the way in which they are attacking corruption. 

They need to do more, but there needs to be real support for 

Ukraine conditioned on them doing the hard work, because ultimately, if Ukraine’s adversaries view it as a failed state, as unable 

to make it through, it encourages the kind geopolitical issues that 

we are worried about. If there is a sense that they are well-supported, they are going to do the right things, they are going to create a more modern Western-oriented state, I think that is actually 

a very positive incentive for Russia to move in the right direction. 

Senator SHAHEEN. Mr. Adams? 

Mr. ADAMS. Ironically, I was sitting in the offices of the International Energy Association in Paris on the day when the Russians 

made the decision to shut off some of the gas to Ukraine. As you 

walk, they have this massive map of Europe, where the pipelines 

are located. 

You just look at the map and you realize how vulnerable Western 

Europe is to Russian sources of energy. They look at that map 

every single day. 

So there are ways of diversifying and looking at other pipelines, 

the trans-Adriatic, which is from Caspian gas. The Azerbaijanis are 

funding two pipelines. Algerian gas. The Germans are certainly 

leading on renewables. Even though German industry complains 

about the price of energy input, Chancellor Merkel has been a 

world leader with respect to solar and alternative forms of energy. 

So I think they are desperately scrambling to look at alternative 

sources. It just takes time to build up that infrastructure. But it 

certainly is a high priority. 

If you look at some of the investment plans that they put in 

place, the Juncker plan, which is a way to promote economic 

FOREI-42327 with DISTILLER

27 

growth and infrastructure, much of that infrastructure is really energy-related as a way to reduce their dependency on Russian oil 

and gas. 

Senator SHAHEEN. Thank you. I know that this hearing is supposed to be on oil and gas prices, but I wonder if I could ask you 

about coal a little bit, because obviously coal has been a huge point 

of contention here in the United States. There are some who believe that some of the policies of this administration have produced 

a decline in coal production. But can you speak to that? And what 

the world market is doing to coal production? 

Mr. ADAMS. He looks at me because I was born and raised in 

Kentucky, and I now live in Virginia, so somehow that makes me 

a coal expert, I guess. I do not know. 

I think the majority leader would not want me commenting too 

much on coal. It is outside my arena, actually. 

Senator SHAHEEN. You do not need to comment on Kentucky 

coal. Can you talk about what is happening in China, in India, and 

some of the other economies where at least I think we have been 

told that coal is their biggest source of energy in the future? Are 

they continuing to go down that road? Are they looking at the reduced prices of oil as a substitution for those coal resources? 

Mr. ADAMS. I think for the Chinese, it is all-of-the-above. Their 

energy demands are enormous. 

I forgot the number of megawatts of nuclear power they are putting in place every week. So it is all of the above. It is something 

like 1,700 megawatts per week of energy consumption they are putting in place. 

They have a lot of coal, too, domestically. I do not think it is the 

same quality of coal that you have in the United States. We export 

a lot of our coal to China. It is a big buyer of U.S. coal. 

So they, like all other commodities we have been talking about, 

are a determiner of price at the margin and a determiner of the 

flow of consumption, so absolutely. 

Dr. KAHN. I hope it is right to add that their own environmental 

problems now could be a potential game changer in terms of changing their incentives to look for that diversification in a way that 

they did not a few years ago. Then also, tying it back into a point 

that Tim made earlier, ironically, perhaps in some sense, the rebalancing of the economy away from heavy machinery and industry 

toward services and a more consumer-based economy ironically is 

a shift away from demand for those things. 

Mr. ADAMS. Absolutely. Stated Chinese policy, green growth, sustainable growth, I think they are serious about it. I do not think 

they are willing to let a hard landing occur because of it, but I do 

think they are serious and adamant about putting in place appropriate environmental restrictions. Putting the scrubbers on, I think 

they are doing what they need to do. Are the scrubbers always on? 

I do not know. But I think they are serious and focused. It is just 

that their needs are so enormous. 

Senator SHAHEEN. Thank you. 

Thank you, Mr. Chairman. 

Senator Cardin? 

Senator CARDIN. I just really wanted to get your view on one 

point about Russia. 

FOREI-42327 with DISTILLER

28 

Russia obviously has been getting more aggressive in its engagement. We have seen that in Ukraine. We have seen it in Syria. You 

indicated that they have the ability to deal with their foreign exchange rates, which I fully understand, and they can manipulate 

that, as has China, when it was to their advantage to manipulate 

their exchange rates. 

It seems like it has not affected the popular support or political 

support in China or Russia. So it seems like that tool is still very 

much available to manipulate the true impact on their economy by 

a hidden tax to their people. 

So I am just trying to figure out, in these low energy prices, what 

the United States should be to doing strategically as it relates to 

Russia, if there are issues we can do. You mentioned alternative 

pipelines in Europe, which would be wonderful. But with low energy prices, the investments there are more difficult. 

So is there a strategy that we should be looking at with low energy prices as it affects the geopolitical influence of Russia? 

Dr. KAHN. Ultimately, I have always viewed the sanctions as 

really the key dial that can be turned. 

Senator CARDIN. Ukrainian sanctions? 

Dr. KAHN. Sanctions on Russia coming out of the Ukraine in a 

sense. We made a conscious decision at the start of that not to go 

for what you might call the nuclear option of comprehensive sanctions, but to start with more modest sanctions and to gradually intensify them over time in response to Russia’s treatment of 

Ukraine. I think ultimately that is still one of the key policy dimensions. 

Senator CARDIN. That is going to be a real challenge moving forward. 

Dr. KAHN. Absolutely. 

Senator CARDIN. Everything we are hearing from Europe is that 

if Minsk II goes forward, then the sanctions are unlikely to continue. If Minsk II does not go forward because of the slow progress 

within Ukraine on reform, it is going to be difficult to extend the 

sanctions in Europe. 

Dr. KAHN. I agree. The only caveat I would put on that is in this 

new world we live in with the use of financial sanctions, there is 

some capacity for the U.S. to continue on with our own sanctions, 

even without Europe moving with us hand in hand in a way that 

was not possible in the old world of trade sanctions. Financial sanctions can be extended beyond our borders and can be effective. 

Obviously, this also entered the debate about issues about our 

own policies toward natural gas and natural gas sales. 

But as a macroeconomist, I guess I would come back to, although 

I know it is a hard one, Tim was just out at the G-20 finance ministers meeting. We just need Europe to do more growth-oriented 

policies, to be promoting growth, using the fiscal space they have, 

using on the monetary tools they have, doing the structural reform. 

I think I share the frustration many have that growth has been 

quite weak over the last several years there, and that a strong and 

prosperous Europe is probably the best to hope for. 

Senator CARDIN. The challenges there are immense, from what 

we see with migration to problems continuing in Greece and other 

FOREI-42327 with DISTILLER

29 

countries, to Great Britain’s decision in June. All of those are questioning the strength of Europe. 

You have not given me any optimism yet on what we should be 

doing with low energy prices against Russia. 

Mr. ADAMS. Well, I am not optimistic that you can do much of 

anything, actually. I think low oil prices are certainly containing 

some of the behavior. It is certainly having a deleterious impact on 

certain sectors. It is forcing tough decisions. 

Over time, it will continue to bite. I am way outside my remit 

on this, but these are a people that have endured anonymous hardships over the decades and centuries. In my trips to mostly Moscow, I do not sense anyone who is willing to jump ship because 

times have gotten tough. The President remains incredibly popular. 

There is not really viable opposition. And they have done a very 

good job of blaming current pain on external actors, such as the 

U.S. 

So there may be marginal changes, but I think we are where we 

are. I am skeptical we can do much more. 

Senator CARDIN. Well, I thank you for your candor. I didn’t particularly like the answers, but I appreciate your candor. 

The CHAIRMAN. Senator Shaheen would like to ask another question. 

I would just say, the fact that he has not had, I think everyone 

would agree, much pushback, much physical pushback on the adventurism, there has not been much of a price for him to pay. It 

has, in fact, created a lot of nationalism within the country. 

Senator Shaheen? 

Senator SHAHEEN. Just a final question and this is off of energy, 

but it goes to the comments you were making about Europe and 

its potential growth policies. 

One of the things I understand is challenging for Europe, as it 

is going to be for the U.S. in the future, is the declining work force. 

One of the opportunities they have with the migrant crisis is to 

provide additional workers that they really need for their economies. 

So is there anybody in Europe who is talking about this, who is 

looking at this as a real opportunity, as opposed to just the negative aspects of that? 

Mr. ADAMS. It is a great question because demographics I think 

are determinative of so many different things. It is a graying population in the industrialized world and in China especially. But in 

many of the emerging markets, we see demographic changes. Our 

perception is emerging markets are young people. But in fact, in 

many emerging markets, the populations are growing older. 

The irony is that in the gulf oil-producing countries, two-thirds 

of the population are under the age of 35. And if you expand to the 

broader region, it is also. So a very young population without great 

prospects of economic activity or housing or prosperity, actually, so 

that feeds into some of the concerns here. 

Actually, German authorities in my conversation with them are 

very sensitive to the skills issue. They say that many of the people 

they are letting in, whether they are Syrians or other nationalities, 

they are going through the appropriate screening program, they 

are being placed in certain cities, and they are actually initiating 

FOREI-42327 with DISTILLER

30 

kind of an internship or skills training exercise and language training. 

But their view is they need workers. They need workers for the 

assembly line. And many of the Syrians are trained professionals. 

They are well-educated. They have, in fact, a very robust and I 

would say very complex, probably underappreciated mechanism for 

assimilating some of these migrants into the local economy, into 

the local work force. 

I have not seen that with respect to other countries. But certainly in Germany, they do have a plan and they seem to be executing on it. 

Dr. KAHN. The only point I would add is the free flow of labor 

within Europe is a founding principle of a successful monetary and 

financial union. I cannot imagine one without the other. That is 

why this debate that is taking place right now is actually so critically important I think on the economic side as well. 

Senator SHAHEEN. Thank you. 

Thank you, Mr. Chairman. 

The CHAIRMAN. I think George Soros may have been in to see 

you in the last day or 2. 

Senator SHAHEEN. He has not, but he should. 

The CHAIRMAN. Okay, okay. 

Let me ask you this question. The investment in infrastructure 

to create more sources of petroleum resources for Europe is obviously something we have worked on for some time with other countries. One of the pipelines that Russia had long planned on does 

not have the support that it once had. 

But I guess this period of time of low prices could put increasing 

pressure on those projects not occurring, and us not taking advantage of a hugely strategic opportunity to cause Europe to be much 

less dependent on Russia. Are you seeing any sign of that right 

now? I know here in our own country, obviously, we are. I would 

imagine you would be seeing that there, but can you give us a perspective on just the building out of pipelines and infrastructure and 

the effect these prices have are having on that? 

Mr. ADAMS. Sure, Senator. In fact, there is a challenge out there on infrastructure. McKensey estimates that we need between $60 

trillion and $70 trillion worth of infrastructure between now and 

2030. But the financing of that infrastructure is lacking. 

I was in Melbourne, Australia, a week ago today, meeting with 

the Future Fund, which is their savings fund, and asking about 

how they are allocating their resources. They have a large percentage of resources in cash, which means they cannot meet their pension liability. I said, what about infrastructure? They said the biggest problem with investing in any kind of infrastructure is the political risk of the rules or regulations changing once the infrastructure is put in place. 

If you are making project assumptions based on 30 years or 40 

years and governments change and the fee structure changes, then 

all of a sudden your project that maybe was just barely making 

money, 3 percent or 4 percent return, is then underwater. 

So there is a real reluctance on behalf of those who are suppliers 

of capital to look at infrastructure with concerns about political 

risk. 

FOREI-42327 with DISTILLER

31 

The other is that there is so much interest in infrastructure 

around the world and a lot of people trying to do deals, the returns 

on those infrastructure projects seem to have been depressed. 

The third is that European institutions, namely the insurance 

companies which have been the normal providers of infrastructure, 

have gone through regulatory changes, one called Solvency II, 

which changes the nature of their balance sheet and forces them 

to hold shorter-term, more liquid instruments. So the capacity of 

domestic European institutions to fund infrastructure has also diminished. 

And also capital charges for the banks, and European banks are 

suffering from NPLs and a whole host of other problems, which we 

can talk about, have also lessened their appetite for long-term investing. 

So you have less capital. You have wariness by some other sovereign wealth funds and others, which are repatriating capital to 

oil producers. And this sense that the rules of the game can 

change. That is why we have the so-called Juncker plan, which is 

a way of using centralized money as a way to capitalize private 

money to invest in oil and gas infrastructure in Europe. 

But I will tell you, it has been very slow in coming and I am 

skeptical we are going to see it anytime soon. Certainly, the need 

is there, but there is a market failure, and there is a funding gap 

going on, which is not only just on energy, but infrastructure globally. 

The CHAIRMAN. Do you want to would add anything, Dr. Kahn? 

Let me just mention you both have been outstanding witnesses. 

It is a privilege for us to have people like you who spend your lives 

in these arenas that help us make decisions. So at least we get a 

good perspective on what is happening. 

I have to say, while you would think there would be significant 

benefits to low energy prices—and hopefully, as you all of mentioned, this has not worked out exactly the way it did in the 1970s 

and 1980s, but maybe at some point it will—there are huge negatives that are taking place and will take place over time. Just the 

destabilizing forces that are going to be taking place over time are 

things we certainly need to stay focused on. 

So thank you both for your expertise, your willingness to be here, 

especially after just returning from China. 

If we could, I am sure there will be other questions, we would 

like to keep the record open until the close of business Friday, if 

you could respond fairly quickly, we would appreciate it. 

The CHAIRMAN. But again, thank you very much. 

With that, the meeting is adjourned. 

[Whereupon, at 11:41 a.m., the hearing was adjourned.] 

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FOREI-42327 with DISTILLER

(33) 

Additional Material Submitted for the Record 

PREPARED STATEMENT OF TIMOTHY D. ADAMS, PRESIDENT AND

CEO, INSTITUTE OF INTERNATIONAL FINANCE (IIF) 

Honorable Chairman Corker, Ranking Member Cardin and Members of the Senate Foreign Relations Committee, thank you for inviting me today to testify on the 

impact of low oil prices on oil importing and exporting countries and the potential 

risks to stability. I am grateful to the Committee for convening this hearing at a 

critical time for the global economy, given elevated financial market stress, rising 

risks of a global recession, diminishing effectiveness of macroeconomic policy tools, 

and the uncertain outlook for the Chinese economy. Emerging markets have been 

at the epicenter of these developments, amidst below potential economic growth, 

heavy net capital outflows, reduced boost from China, weak global trade, and growing economic strain among oil exporters. The Institute of International Finance (IIF) 

conducts research on the global economy and financial markets and assesses key 

global risks and policy challenges. These themes, including the impact of low oil 

prices on the global economy, have been at the core of our recent research. 

The decline in oil prices by over 70% since mid-2014 has benefitted oil-importing 

economies by raising household disposable incomes and lowering inflation, such as 

in Emerging Asia and Emerging Europe where energy accounts for a large share 

of the consumption basket. Lower oil prices have also helped reduce external 

vulnerabilities in oil-importing countries with large current account deficits like 

India, Indonesia, South Africa and Turkey. Policymakers in many oil-importing 

countries have used this opportunity to maintain easy monetary policy to support 

growth and cut back spending on subsidies (such as in India and Indonesia) to free 

up fiscal resources for capital expenditure, including infrastructure. 

On the other hand, oil exporters have come under immense pressure amidst a deterioration in fiscal and current account balances, particularly countries with pegged 

exchange rates and less diversified economic structures. Countries with substantial 

assets (such as Saudi Arabia and Qatar) have been able to cushion growth in the 

near-term by running down reserves and limiting fiscal adjustments. Others with 

more limited cushions have implemented sharp fiscal, monetary and exchange rate 

tightening measures (such as Russia and Nigeria) to reduce vulnerabilities from low 

oil prices, even at the cost of slower growth in the short-term. Meanwhile, countries 

like Venezuela have delayed the necessary policy adjustment, increasing risks of a 

sharper downturn ahead. 

Looking ahead, if oil prices remain subdued, as we expect, economic 

vulnerabilities among oil exporters are likely to accentuate. This raises the question 

of which oil-exporting economies would come under the greatest economic strain 

under such a scenario. To assess this, we have looked at three types of economic 

vulnerabilities emanating from low oil prices for oil exporters: 1) Fiscal vulnerability 

from the loss of oil-related revenues, deterioration in fiscal balance, and rise in government debt; 2) External vulnerability from the loss of oil export receipts, deterioration in current account balance, decline in foreign exchange reserves, and increase 

in external debt; and 3) Macroeconomic vulnerability from the loss of oil-related economic activity. In our analysis, we have evaluated both the extent of an economy’s 

oil dependence in a flow sense and the resources accumulated by a country from a 

stock perspective that would help cushion the impact of lower oil prices. 

Most Vulnerable Countries 

Assessing twenty major oil-exporting countries using this approach, we find five 

countries to be most economically vulnerable: Venezuela, Iraq, Libya, Angola and 

Bahrain (See Figures 1 and 2 below). These countries have significant weaknesses 

across all three types of economic vulnerabilities. In particular, these countries have 

heavy reliance on oil as a source of export receipts (especially Iraq and Angola), and 

as a source of fiscal revenues (particularly Bahrain, Iraq and Libya). Most of these 

countries also have elevated government debt, high production costs (especially Angola and Venezuela), and limited cushions in the form of international reserves or 

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sovereign wealth fund resources (particularly Venezuela). More importantly, these 

countries operate under currency pegs, reducing their economic capacity to adjust 

to an external shock and making it more likely that the eventual adjustment will 

be highly disorderly and negative for economic growth. In Venezuela, we are particularly concerned that continued delays in exchange rate and spending adjustments will prolong and deepen the recession, increase the risk of debt default, and 

threaten social disorder. 

In addition to these five most vulnerable countries, an additional group of six 

countries—Nigeria, Russia, Azerbaijan, Kazakhstan, Oman and Algeria—stand out 

as economically vulnerable based on our criteria. These countries have shown greater ability to adjust over the past two years to lower oil prices by devaluing (Nigeria 

and Algeria) or free floating (Russia, Azerbaijan and Kazakhstan) their currency, 

imposing restrictions on balance of payments, and tightening monetary policy sharply in many cases. Nonetheless, we do still see these countries as being squeezed further in the years ahead, and being pushed towards further fiscal consolidation (for 

example, in Russia), exchange rate adjustment (Nigeria) and emergency IMF support (Azerbaijan). 

Countries with Rising Vulnerabilities 

There are a number of other countries, mainly in the Gulf, where we see 

vulnerabilities contained for now but to rise as the oil price decline prolongs. These 

economies rely heavily on oil revenues with exchange rates pegged to the dollar— 

including Saudi Arabia, Kuwait, Qatar and UAE. These countries are less economically vulnerable to a short-term decline in oil prices because they have strong national balance sheets (low government debt and/or high international reserves/sovereign wealth fund assets), substantial current account surpluses, and low oil production costs (helping to protect market share). Continued growth in the nonhydrocarbon sector is cushioning overall economic growth, especially in the UAE which 

has a diversified economy. These countries have more time to adjust to lower oil 

prices as they can cushion the short-term impact on their economies by running 

down accumulated assets and ramping up borrowing. Eventually, however, if low oil 

prices are extended over time, these economies will need major and sustained economic and fiscal adjustment, especially Saudi Arabia which has a relatively higher 

fiscal breakeven price for oil. Such adjustments are now starting to get underway— 

for example by reducing oil subsidy bills and slashing investment projects, but cuts 

will need to go much deeper. 

Least Vulnerable Countries 

The last group of countries lying at the lower end of the economic vulnerability 

spectrum are Malaysia, Mexico, Colombia, Ecuador and Iran. These countries combine significant oil exports with more diversified economies. Countries like Colombia, Mexico and Malaysia have come under heavy market pressure due to their oil 

exposure but these economies are less exposed to the negative impact of low oil 

prices on growth and balance of payments, as flexible exchange rates and track 

records of good policy management make them better equipped to weather pressures 

through a combination of fiscal and/or monetary policy adjustment and exchange 

rate depreciation. In Iran, the lifting of sanctions is likely to boost oil exports and 

private investment, providing support for growth. 

To conclude, the past two years have forced oil-exporting countries to start adjusting their economies. Exchange rates have been allowed to depreciate, monetary policy has been tightened, and most commonly, fiscal policy measures have reduced 

capital expenditures, cut back subsidies and expanded tax and non-tax revenue 

tools. However, low oil prices are likely to be sustained, implying that pressures on 

fiscal balances and public debt will escalate, calling for even more aggressive fiscal 

consolidation and other policy actions going forward. A number of countries that are 

most vulnerable will come under heavy pressure over the next few years. Countries 

already facing political risk (Venezuela) or conflicts (Iraq, Libya) will be particularly 

vulnerable. Many GCC countries which have been cushioned by depleting assets accumulated over many years will need to make more meaningful adjustments. This 

is likely to weigh on economic growth for a prolonged period and increase risks of 

social tensions amidst high inflation and unemployment, and cut backs in social 

spending, transfers and government wages. Managing growth and social stability 

under such circumstances would therefore call for accelerating reforms beyond fiscal 

policy in order to rebalance their economies towards non-oil sectors. This would include improving the business climate, continuing with financial sector development, 

reforming the SOEs, strengthening institutions, investing in human capital, and attracting private investment and FDI, especially in non-oil sectors. 

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35 

Mr. Chairman, Mr. Ranking Member and members of the committee, thank you 

again for giving the opportunity to testify before the Committee. I look forward to 

answering any questions that you may have. 

Figure 1 

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Figure 2 

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PREPARED STATEMENT OF ROBERT KAHN, STEVEN A. TANANBAUM SENIOR FELLOW

FOR INTERNATIONAL ECONOMICS, COUNCIL ON FOREIGN RELATIONS

Chairman Corker, Ranking Member Cardin, and members of the committee, 

thank you for the invitation to testify today. I am honored for the opportunity to 

discuss the economic and geopolitical implications of low energy prices. I would 

highlight three takeaways in particular: 

• Low oil prices are likely to be persistent. Emerging market oil exporters that 

drew on fiscal and asset buffers in 2015 to delay adjustment can no longer put 

off essential reforms. 

• The playbook for reform includes moving energy prices to world market levels, 

strengthening and better targeting the safety net, and putting macroeconomic 

policy on a sustainable footing. The IMF can play a vital role in support of these 

efforts, reinforcing U.S. strategic interests. 

• Venezuela is an economy on the edge. A default and economic crisis seems to 

be a question of when, not if. U.S. policymakers need to be planning now for 

a lead role in resolving the crisis, when Venezuela has a government willing to 

work with the west. 

The sharp decline of oil and natural gas prices has been a rare but significant 

shock to the global economy. In less than two years, we have seen the price of crude 

oil dropping from about $100 per barrel to about $30 today. During this period, the 

prices of natural gas and many other commodities also have decreased sharply. Both 

demand and supply factors have contributed to this trend. In Medium-Term Oil 

Market Report 2016, the International Energy Agency (IEA) estimates that oil supply exceeded demand by 2 million barrels per day in 2015. Absent a significant production cut, it is hard to imagine prices rising materially till at least 2018. Futures 

markets also predict low oil prices are likely to persist for some time. 

The oil price downturn creates an important windfall for consumers, and has 

boosted prospects for oil importing countries such as India, China and Japan. But 

for oil exporting countries, low prices exert heavy financial and fiscal burdens. This 

comes at a time when the global economy already faces sluggish growth and significant downside risks from slowing Chinese growth, volatile exchange rates and capital flows, and high corporate debt. While economic vulnerability is rising, policymakers’ ability to respond is not; instead it is becoming more constrained. Many oil 

exporters are seeing fiscal buffers dissipated, and in some cases weak policies and 

populist pressures are constraining government’s ability to act. 

Reflecting this weaker environment, the International Monetary Fund (IMF) in 

recent years has repeatedly downgraded its growth forecasts, most recently in January when its World Economic Outlook projected global growth of 3.4 percent; further 

downgrades are likely. Last week, the finance ministers and central bank governors 

of the Group of Twenty (G20), meeting in Shanghai, China, acknowledged these 

growth concerns and recognized the need for policymakers to do more—but there 

was little in the way of specific new policy commitments. 

The U.S. economy nonetheless has proven resilient. In 2015, the real GDP grew 

by 2.4 percent. The unemployment rate is currently 4.9 percent, the lowest level 

since 2008. Lower oil prices appear to have been a small drag on growth last year, 

as a 40 percent drop in capital expenditures in the oil and gas sector cancelled out 

the boost from lower oil to consumer spending. One reason for the muted consumer 

response to date may be the desire to save and repair balance sheets after the damage caused by the Great Recession. While this is a healthy development, it is possible that consumers could become more willing to spend if oil prices remain low. 

Most major forecasters expect similar levels of growth in the United States this 

year, which would place us above other advanced economies including the eurozone 

and Japan. Nevertheless, the U.S. economy is not immune to oil-related turbulence. 

Many of the emerging markets in turmoil share close trade and financial linkages 

with the United States. Stock market turmoil in recent months has contributed to 

a tightening of financial conditions, while the appreciation of the dollar along with 

lower oil prices is imparting a deflationary impulse to the economy. All of this suggests that U.S. policymakers will need to continue to be alert to the risks emanating 

from abroad. 

Assessing Fiscal Sustainability and Risks for Emerging Market Exporters 

A starting point for assessing the risks from lower oil to emerging market exporters is the fiscal breakeven price, the level of oil price that balances government 

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1For a more comprehensive analysis of the isights and pitfalls of using breakevens, see a report by my CFR colleagues Blake Clayton and Michael A. Levi, from which figure 1 is taken. 2Source: Clayton and Levi (2015) ‘‘Fiscal Breakeven Oil Prices: Uses, Abuses, and Opportunities for Improvement’’ 

budget based on current prices and policies (figure 1).1 During much of 2015, oil 

prices hovered around $50 per barrel, meaning most countries in Figure 1 faced 

world prices that were below their breakeven prices. With the further fall in oil 

prices to current levels, it is likely that the gap in 2016 between current prices and 

the ones that balance the books in most oil exporting countries has grown larger. 

Solely relying on this metric could lead to overconfident predictions of geopolitical 

risks and future oil prices. What matters is the willingness and ability of countries 

to adjust to these shortfalls. It was reasonable, through much of 2015, for oil exporting country policymakers to assume that oil prices would rebound, and so to delay 

adjustment. Fiscal deficits were allowed to increase, exchange rates in some cases 

were depreciated, and assets (including importantly sovereign wealth fund holdings) 

were drawn on. It was only later in 2015, following a further oil price decline and 

as budgets were being prepared for 2016, when many of these countries began to 

take seriously the need for policy adjustments. 

This suggests that the potential for disruptive adjustment is higher in 2016. For 

now, we are continuing to see sizeable asset drawdowns, with recent reports that 

countries such as Russia, United Arab Emirates, and Qatar are liquidating their investments, which according to some analysts could result in withdrawal of $400 billion of equities this year. Indeed, some reports suggest that withdrawals from these 

‘‘rainy day funds’’ were a major factor behind the stock market turbulence in January of this year. 

How long these countries can continue to drain savings is a difficult question to 

answer, given the lack of transparency from many of the sovereign wealth funds 

(SWFs). In a report on the regional economic outlook, the IMF argues that many 

governments in the Middle East would run out of fiscal buffers in less than five 

years due to large fiscal deficits (assuming prices in the $50 per barrel range). 

Meanwhile, countries such as Venezuela are facing unsustainable public debt and 

possibility of default as soon as 2016. For these countries, ‘‘muddling through’’ is no 

longer a viable option. 

FIGURE 1. IMF FISCAL BREAKEVEN ESTIMATES 2

Therefore, sizeable adjustments of fiscal and energy policies are imperative in 

these oil exporting countries. Some indeed have taken actions. Mexico, for instance, 

eliminated fuel subsidies in December 2014, which would offset the loss from exportrelated fiscal revenues. By 2018, the country also plans to fully liberalize domestic 

energy prices. Saudi Arabia has taken some steps in restoring fiscal sustainability, 

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3 Richard Haass (2014) ‘‘The New Thirty Years’ War’’ 

energy prices. Saudi Arabia has taken some steps in restoring fiscal sustainability, 

exemplified by the drastic spending cuts in its 2016 budget and first steps at electricity and fuel price reform. 

In the remainder of this testimony, I will touch on Iraq and the Middle East, Russia, Nigeria, and Venezuela, highlighting some challenges faced by these economies 

as well as policy adjustment options they have. 

Iraq and Middle East 

In Iraq, the drop in oil prices coupled with supply disruptions due to Islamic State 

(ISIS) attacks have had a profound effect on an economy that is heavily reliant on 

oil for government financing. In 2014, oil accounted for over 94 percent of the central government’s revenue. Worse yet, the ISIS attacks are hindering the development of non-oil sectors by disrupting trade and destroying infrastructure. The government deficit increased from 5.6 percent of GDP in 2014 to over 15 percent in 

2015. Under a non-financing IMF program, the government is attempting fiscal consolidation, but firm policy implementation will be required to sustain the adjustment effort and preserve domestic stability. 

Iraq’s plight is not uncommon in the region. In CFR’s recently released 2016 Preventive Priorities Survey, eight of the eleven most critical contingencies are related 

to events unfolding or ongoing in the Middle East. Whether the concern is Syria, 

rising tensions between Saudi Arabia and Iran, or a weakening of state control elsewhere in the region, it is hard to discount the Middle East as the leading source 

of geopolitical risks, ‘‘new thirty years’ war.’’ 3 The instability in the region could 

continue to impede many governments’ efforts to diversify economic structures and 

promote private sector growth, which are crucial for the region’s economic future. 

Russia 

The recession in Russia is deepening, due to a combination of factors: poor economic policies, low energy prices, and sanctions imposed by the United States and 

the European Union (EU). The economy contracted by 3.7 percent in 2015 and will 

likely shrink by more than 1 percent this year. With nearly half of government revenue from oil and gas, prospects for energy markets are critical to economic results. 

The 2016 budget assumes oil price to be $50 per barrel, which would produce a fiscal deficit of 3 percent of GDP. But this assumption is looking badly outdated. With 

the current oil price, Russia could see a deficit of 7 percent, putting more pressure 

on the currency. Similar to many energy-exporting countries, Russia’s revenue 

shortfall exposes its difficulty in generating non-energy incomes and subsequently 

structural weaknesses. 

In response to these pressures, the government has chosen to run down wealth 

funds and allow a sharp depreciation of the rouble. That depreciation has provided 

support for the budget (by raising the rouble value of oil revenue) but at a significant cost to the broader economy. Inflation has risen well above target, a tax on all 

Russians and especially painful for those on fixed incomes. Real incomes have fallen 

sharply. On its current trajectory, the government’s fiscal buffers will be exhausted 

by end 2016, which could put additional pressure on the government. Demographic 

change and decades of distorted prices and poor investment are further undermining the long-term health of the economy. The risk of a crisis will rise over time 

unless the government adopts more fundamental reforms. 

Nigeria 

Despite efforts of diversification, the Nigerian economy is struggling to come to 

grips with low oil prices. Non-oil sectors are the main drivers of the country’s 

growth, but in absolute terms oil revenues remain significant, and the shortfall to 

the budget is causing stress. The country’s GDP growth was 2.8 percent in 2015, 

a significant drop from the 6.3 percent in 2014. Moreover, the general government 

deficit was 3.3 percent GDP in 2015, almost doubling the figure of 2014 despite a 

sharp drop in public investment. Foreign exchange restrictions introduced by the 

central bank have caused credit problems for the private sector and contributed to 

broader shortages in the economy. 

In view of the worsening conditions, the country is seeking emergency loans of 

$3.5 billion from the World Bank and the African Development Bank (AfDB). If 

granted, these funds could help cover the government’s financing needs but may not 

be sufficient. Further, financing alone cannot solve Nigeria’s fundamental problems. 

The country’s external balance has been deteriorating. The currency naira is fixed 

but under pressure, and the Nigerian central bank has had to deplete foreign exchange reserves to defend the peg. While reserves remain ample ($28 billion at the 

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end of 2015), there would look to be a compelling argument that Nigeria should liberalize (devaluate) naira and/or loosen capital controls, as part of a broader strategy 

to promote exports, further diversify from oil, and relieve external pressures. 

Venezuela 

The economy is descending into a deep and profound crisis—reflected in severe 

shortages, hyperinflation, and a collapse in economic activity. It faces a widening 

financing gap, and has imposed highly distortive foreign exchange controls. Debt 

service far outstrips dwindling international reserves. Recent policy measures by the 

government, including a rise in gasoline prices, fail to meaningfully address the imbalances. The Venezuelan government made a $2.3 billion debt payment on February 26. But the debt of state oil company Petroleos de Venezuela, S.A. (PDVSA) 

due this year is more worrisome. A default increasingly appears to be a question 

not of ‘‘if,’’ but ‘‘when.’’ 

There is no doubt that the dramatic decline in oil prices has hit Venezuela hard. At $30 per barrel, oil exports will be around $26 billion this year, down about threequarters from 2012. The net export revenue is inadequate to meet debt service this 

year of nearly $20 billion on $125 billion of debt. Altogether, market commenters 

have estimated a financing gap of around $30 billion. Meanwhile, reported reserves 

are only $15 billion, and there are serious questions as to whether all of those reserves (especially the gold) are freely useable. In sum, it will take extraordinary 

measures to make it through the year without a default. And if the government responds by further compressing imports, popular support for the government could 

collapse. Change could come quickly, not because of a debt payment due but rather 

because of domestic conditions. 

Meanwhile, the economy likely declined by around 10 percent last year, and according to the IMF is expected to decline by an additional 8 percent this year. Inflation was officially 180 percent in 2015, though the actual number was probably closer to 250 percent, and accelerating rapidly this year. In response, the government 

has invoked emergency powers through mid-March, devalued the primary official 

exchange rate by 37 percent, and adjusted some domestic prices—but this has done 

little to address widening imbalances and shortages. 

China has been the primary provider of financing to the government in recent 

years, and while there is low transparency to these deals, it is thought that net 

claims are on the order of $30 billion. Many of the contracts require payment in 

oil, but the decline in the price has dramatically increased the quantity that needs 

to be provided. Venezuela needs continuing relief from the required amount, but at 

the same time it is not in China’s interest to be seen as providing loans under the 

guise of commerce that serve solely to extend the life of the current government. 

Even today, China’s message needs to be that it will be a critical player in a rescue 

package, and to that end cannot be too closely associated with the current government or policies. 

The current government of Venezuela is unlikely to seek help from international 

financial institutions. It will also refuse cooperation with Western governments. Indeed, the IMF is operating largely in the dark. The last IMF review of the economy 

was in 2004, and Venezuela ceased all cooperation with the Fund in 2007. But it 

is not too early to begin planning for a time when a future Venezuelan government 

is willing to take the hard measures that warrant strong and broad international 

support. 

When conditions warrant, international policymakers should move fast rather 

than let the crisis fester. A bold adjustment program will need to include the following items: 

• A rapid move to unify the exchange rate regime 

• Move domestic energy prices to the world levels 

• A strengthened and better targeted social safety net system that protects those 

most in need from the dislocations caused by the adjustment effort 

• A sustainable budget (including a broadening of the revenue base) and well-anchored monetary policy. 

• A comprehensive program to recapitalize the banks. 

Short-term bridge financing, perhaps linked to oil, may be needed once agreement 

is reached on a comprehensive adjustment program. Given the likely financing 

needs, any future IMF package will need to include at a minimum a debt reprofiling 

(an extension of maturities with limited net present value loss) to provide breathing 

space. Whether the IMF goes further, and demands a deep restructuring because 

the debt is unsustainable, is hard to know given the current uncertainties. However, 

extraordinarily high debt as a share of exports suggests the need for restructuring, 

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as would the ratio of debt to GDP (the Fund’s preferred metric) if a unified exchange 

rate settles near the black market rate. 

China will need to contribute, through transparency about its claims on the government and a willingness to provide relief through a negotiation that leaves other 

official and private creditors with a sense that there is fair burden sharing. That 

will be a change in how China has been operating in emerging markets, but would 

go a long way toward becoming a responsible part of the global rescue architecture. 

The IMF is uniquely placed to develop a bold program that contains these elements, 

and mobilize support to ensure adequate financing for the adjustment. U.S. government support will be essential to putting such a package together. 

Conclusion: Policy Adjustments to Prevent Crises 

While the experience of oil exporters vary significantly in terms of the scale of 

the imbalances, the assets that can be drawn on to deal with the shock, and the 

ability of policy to adjust, there are common elements. Policy adjustments need to 

be made, ideally ahead of a crisis. Failure to address these imbalances could translate into crises of much larger scale and spillover into the United States in unexpected fashions. Commenting on the 1994 Mexican peso crisis, Rudi Dornbusch stated that ‘‘the crisis takes a much longer time coming than you think, and then it 

happens much faster than you would have thought, and that’s sort of exactly the 

Mexican story. It took forever and then it took a night.’’ Where there is a willingness to take tough measures, there are important benefits to IMF-led international 

support in terms of policy advice, strong reform packages, and financial support 

where needed. Low energy prices are generating global risks, and U.S. policymakers 

need to be vigilant and ready to act. Thank you. 

The Council on Foreign Relations takes no institutional positions on policy issues 

and has no affiliation with the U.S. government. All statements of fact and expressions of opinion contained herein are the sole responsibility of the author. 

Æ 

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