[Senate Hearing 114-787]
[From the U.S. Government Publishing Office]



                                                        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

                               __________



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                COMMITTEE ON FOREIGN RELATIONS         

                BOB CORKER, Tennessee, Chairman        
JAMES E. RISCH, Idaho                BENJAMIN L. CARDIN, Maryland
MARCO RUBIO, Florida                 BARBARA BOXER, California
RON JOHNSON, Wisconsin               ROBERT MENENDEZ, New Jersey
JEFF FLAKE, Arizona                  JEANNE SHAHEEN, New Hampshire
CORY GARDNER, Colorado               CHRISTOPHER A. COONS, Delaware
DAVID PERDUE, Georgia                TOM UDALL, New Mexico
JOHNNY ISAKSON, Georgia              CHRISTOPHER MURPHY, Connecticut
RAND PAUL, Kentucky                  TIM KAINE, Virginia
JOHN BARRASSO, Wyoming               EDWARD J. MARKEY, Massachusetts


                  Todd Womack, Staff Director        
            Jessica Lewis, Democratic Staff Director        
                    John Dutton, Chief Clerk        


                              (ii)        

  


                            C O N T E N T S

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                                                                   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)        

  


    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.
    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 surprised 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 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.
    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 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 oil-producing 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.
    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.
    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.
    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 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 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?
    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.
    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.
    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.
    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.
    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.

                                Table 1.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]




    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 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 
resolution 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 Chinese 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 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 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 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 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. 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 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 long-term, 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 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 
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.
    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 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 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.
    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.]


                              ----------                              



              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 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.
    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.

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                                Figure 2

 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 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.
---------------------------------------------------------------------------
    \1\ For 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.
---------------------------------------------------------------------------
    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\
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    \2\ Source: Clayton and Levi (2015) ``Fiscal Breakeven Oil Prices: 
Uses, Abuses, and Opportunities for Improvement''
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    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 export-related fiscal revenues. 
By 2018, the country also plans to fully liberalize domestic 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.
---------------------------------------------------------------------------
    \3\ Richard Haass (2014) ``The New Thirty Years' War''
---------------------------------------------------------------------------
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 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 three-quarters 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, 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.