May 18, 2018
Statement of Ariel Cohen, PhD,
Nonresident Senior Fellow
Atlantic Council`s Global Energy Center

Committee on House Judiciary
Subcommittee on Regulatory Reform, Commercial and Antitrust Law

May 18, 2018

Chairman Goodlatte, ranking member Nadler, and honorable members
of the subcommittee, thank you for inviting me here today. My
name is Ariel Cohen1, and I am a Non-Resident Senior Fellow at
the Atlantic Council. The views expressed here are mine alone,
and I am grateful for the opportunity to express my assessment of
OPEC and the destabilizing effects of that organization`s multi-
decade oil market manipulation on global security.

The monopolization of strategic resources by powerful entities is
a phenomenon as old as trade itself. From China`s infamous Salt
Commission in 758 AD to U.S. Steel at the turn of the 20th
century, history is replete with cautionary tales of distorted
commodity markets and their deleterious effects on populations.
More than mere market failures, however, the concentrated control
of basic necessities is a threat to our very way of life. Oil
today, much like salt in ancient China or steel in 1900, is a
strategic resource with no large-scale substitute yet - until
electric propulsion and fuel choice replaces the current
dependence on gasoline and diesel fuel. Given that oil is the
lifeblood of the international trade system, the United States
and the global community at large can no longer afford to leave
this critical market vulnerable to manipulation.

OPEC and its allies and partners, which now include Russia - the
world`s largest crude oil producer - pose a significant threat to
international order. Accounting for over 40 percent of global oil
supply and nearly 80 percent of the world`s proven reserves, the
oil cartel and its allies wield an unprecedented - and
unacceptable - capability to determine energy market outcomes.
Although OPEC is not a monopoly in the pure economic theory sense
- there are indeed multiple sellers of oil across the globe - it
is an oligopoly and a market maker: it meets the economic
definition of a monopoly power -- an entity with sufficient
leverage to influence the price, output, and investment of

OPEC member countries use this quasi-monopolistic power to quash
competition and provide the cash flow of their respective
governments - many of whom are direct geopolitical competitors of
the United States. OPEC members` and its allies spend tens of
billions of dollars on a yearly basis to support terror, like
Iran, or build a formidable nuclear arsenal aimed at the United
States, as Russia does. Far from the guarantor of oil price
stability it claims to be, OPEC is a collusive entity which sows
uncertainty in the global oil markets, undermines U.S. energy
security, and emboldens our enemies. I therefore come to you in
direct support of (HR/NOPEC) legislation.

In the second half of 2014 oil prices crashed - the result of
weak global economic growth and an influx of supply from U.S.
shale. The world looked to OPEC to correct the massive downturn,
which saw prices slide from over $110 per barrel in June of that
year to $50 by January 2015. Rather than pulling back supply to
increase prices, OPEC opted to maintain production levels in an
effort to snuff out North America`s fledgling Shale industry. The
results were disastrous: Prices fell to below $30/bbl by January
2016. Investment in the energy sector collapsed, spilling over
into other commodities and roiling the global banking sector.
While low oil prices are in many ways beneficial to the U.S.
economy, the rapidity of the price drop amplified by OPEC and its
allies to protect market share against American competition
deepened the global recession.

Today we are subject to a more familiar and possibly more
dangerous form of OPEC market manipulation: coordinated supply
cuts. They did it in 1973 and 1979 in the two Arab Embargos: the
first time after the Yom Kippur War in the Middle East, and the
second time after the fall of the Shah. Since OPEC and Russia
reached their decision to restrict output in late 2016, the price
of Brent crude has almost doubled, from $40/bbl to just under
$80/bbl today. OPEC cuts have eliminated 1.8 million barrels per
day from circulation - two percent of global supply - amidst
shrinking worldwide stockpiles and growing demand. Production-cut
compliance within the OPEC & eleven non-member state alliance -
informally known as the Vienna Group -- stand at an astonishing
163 percent, with all but two member countries meeting their
quota obligations, a testament to the organization`s resolve.
Last month Russia reported its first period of 100 percent
compliance, reaching its agreed cuts of 300,000 barrels per day.
OPEC and its allies are expected to further extend supply
restrictions when they meet in Vienna later this year.

Artificially high oil prices threaten U.S. energy security. The
United States remains the world`s leading consumer of oil -
accounting for twenty percent of the world`s daily demand - and
relies heavily on energy imports to meet its needs. Oil price
spikes like those orchestrated by the OPEC cartel harm the many
American industries which rely on petroleum products for
feedstock - such as the plastics and fertilizers, as well as the
automotive and airline sector.

Higher gasoline prices mean American consumers are left with
lower disposable income which they could otherwise use to invest
or pay down debt. Former Chairmen of the Federal Reserve Janet
Yellen described the negative consequences of high oil prices in

and . . .tends to have a dampening effect on consumer spending.
...Staff analysis at the Federal Reserve Board indicates that
a[n]...increase in retail gasoline prices. . .reduces household
disposable income ... and hence tends to exert a significant drag
on consumer spending.``

Beyond the economic harm inflicted on American industry and
consumers, high oil prices pose grave risks to international
security. Some of this country`s most dangerous geopolitical
competitors are de facto petro-states - meaning that they rely
disproportionately on oil and gas revenue to meet their fiscal
responsibilities. High energy prices grant these petrostates
increased flexibility to pursue destructive foreign and domestic
policy agendas.

The Russian Federation is a textbook case of how strong oil
prices can engender aggressive foreign policy action. June of
2008 saw Brent crude reach its all-time high of $160/bbl. Just
two months later, Russia launched its invasion of Georgia,
killing hundreds, and putting NATO on its highest state of
military readiness since the Yugoslav war. This was more than a
coincidence (follow up sentence?). The oil price drop which
followed shortly thereafter - bringing oil to under $50/bbl by
December - also dampened Russian aggressiveness. Five years of
relative calm ended in 2013 when oil broke and maintained a price
point above $100. The Euromaidan revolution exploded shortly
thereafter. In March of 2014 Russia annexed Crimea and entered
eastern Ukraine Brent crude prices stood near the decade`s peak
of $107/bbl.

Russia`s costly commitments in eastern Ukraine and the Crimea are
now compounded by further military expenditures in Syria, where
Putin has pledged his support of President Bashar-al-Assad. While
Russia has run a budget deficit since 2012 - a function of low
oil prices and consistent annual increase in military spending as
a percentage of GDP (climbing from 3.7 percent of GDP in 2012 to
5.4 percent in 2016 according to WB) Russia may face its first
budgetary surplus at the end of this fiscal year. Oil and gas
income, which account for some 40 percent of Russia`s federal
budget revenue, stood at USD 8.5 billion in 2017. This year,
thanks to OPEC and Russia`s sustained production cuts, the
Russian Ministry of Finance is anticipating a five-fold increase
in petro revenues - nearly USD 45 billion. The Russian Economy
grew 1.3 % year-on-year in Q1 of 2018, representing its 6th
straight quarter of growth after two years of recession.

With the defense sector the primary beneficiary of Russian
deficit spending over the past decade, there is little doubt that
this new, influx of oil and gas revenue generated by the
Kremlin`s agreement with OPEC will support Russia`s ongoing
nuclear and conventional military build-up, confrontation with
the West, and world-wide propaganda activities, spearheaded by RT
multilingual TV broadcasting.

Oil and gas exports also fuel continuous occupation of parts of
Ukraine in violation of international law, aggressive behavior in
Central and Eastern Europe, Eurasia and the Middle East,
specifically in Syria, where the Assad regime repeatedly used
chemical weapons. These Russian policies put continuous pressure
on the U.S. and its allies, from the Baltic Sea to the
Mediterranean. Finally, domestic crackdown on human rights, such
as freedom of assembly, which ignore Russia`s constitutional
guarantees, the build-up of a massive domestic militaries police
force (the National Guard), are all funded by the oil and gas

Iran is yet another beneficiary of The Vienna Group`s artificial
oil price inflation. The Islamic Republic is a well-documented
exporter of terrorism. It armed, equipped, trained, financed, or
gave haven to organizations such as Hamas, Hezbollah, Houthi
rebels, and even Al-Qa`ida, and now boast the medium range
ballistic missile capability to complement its nuclear weapons
program. Not only the Islamic Republic is capable of targeting
U.S. forces in the Middle East, our Gulf Cooperation Council
allies, and Israel. Parts of Europe are also in the range of the
Iranian missile arsenal.

Teheran is engaged in a host of destabilizing conflicts across
the Middle East - from Syria to Yemen to Lebanon and Iraq -
depends on oil and gas revenues to meet 30 percent of its fiscal
needs. Iranian crackdown against the domestic opposition resulted
in 58 dead, 8,000 arrested, and numerous but unknown number

Yet, after the JCPOA $150 billion bonanza, came the oil exports
fiesta. Between March and December of 2017, hydrocarbon revenue
for the Iranian regime yielded USD 13 billion, during which
exports hovered at around 2.2 million bpd. Even with the Trump
Administration`s recent announcement to revoke sanctions relief
under JCPOA, Iran continues to ramp up production: last month the
Islamic Republic exported 2.7 million bpd, with every 100,000
barrels equating to USD 8 million in today`s prices. Though the
latest U.S. restrictions will certainly hinder Iranian oil
exports, it is unlikely that we will see a return to 2012 levels
(1.5 mmbd) when the Obama Administrations sanctions first went
into effect.

Without adequate buy-in from the international community, U.S.
imposed sanctions on Iran`s hydrocarbon sector are expected to
result in a 20 percent cut in oil exports - between 400,000 and
500,000 barrels a day. With oil prices at their highest point in
over 3.5 years, sanction pressure may not be sufficient to
hamstring Iran`s oil production and exports, and thus not
sufficient to deter the Republic`s destabilizing policies across
the region

To conclude, the United States can no longer allow OPEC and its
allies to operate with immunity from sensible anti-trust
legislation. The consequences of one group controlling 40 percent
of the world`s oil production and 80 percent of proven reserves
are too menacing to ignore. Thank you.