 I'm Jake Feindel, this is State Tech. More specifically, it's energy in America is what it is. We do this on Wednesday afternoons every couple of weeks with Luc Plurici, wherever he may be in the world. He happens to be in Tokyo right now. Welcome to the show, Luc. Good to be here, Jay. Nice sunny morning. 10 o'clock in the morning here in Tokyo on Thursday. All right, well, that makes a five-hour difference, since you said three o'clock in the afternoon here in Hollywood. So there's so much going on in the world today, Luc, so much happening. One thing and another is like chock-a-block. And we could go on talking about all these things, but we're going to talk today about coronavirus, which is a really good topic and how it is affecting or will affect energy pricing and the energy markets. Because after all, as they say, things are uncertain in the time of coronavirus. What do you think? Yeah, first, I do think we tend to underappreciate the economic consequences. In a way, you could say there's some good news from this. It probably means that gas mean prices will be a bit lower in Honolulu. They might be a lot lower, actually. You may see a considerable drop, and we'll go through that a bit. And we have some data to look at the comparison of SARS and other sorts of breakouts, such as this. But this is a big deal. I know that this has been in the Hawaiian press, and government authorities have been talking about this, because it can have a rather devastating effect on travel. And you'll see that in some of the pictures we have here, but also, of course, in main tourist destinations, such as Hawaii. And I don't know what the data is showing. I know initially it doesn't look so bad, but we're really seeing massive shifts in air travel now. And you'll see how this shows up in a lot of different ways. It's quite amazing. And it's something that I really initially thought the administration was overreacting, was being much too aggressive, and trying to shut down travel. But there's some more recent data coming out that suggests this thing is a lot more serious than we have thought initially. And we'll talk a little bit about that first as a setup to this problem. Yes. Well, we've done three or four shows on coronavirus already, and we have state director of infectious disease. We've had the director of infectious disease at Queen's Hospital on last week, and we're going to have the director in the health department coming on next week. Actually, Friday. And so, I mean, what's happening is that nobody is able to stop this. The isolation thing doesn't necessarily work. And so what you have is the possibility of an unrestrained epidemic and query how long does that take to resolve itself? Yeah, so I think there's a little outside my lane here talking about epidemiology. But the recent research suggests that there was this sense that you could be asymptomatic and show no symptoms and transmit the disease. I think the most recent, some of the most recent research and observations, let's say, among professional epidemiologists are indicating that no, that's not the case. Some people have very low level symptoms, but you do have to be symptomatic to transmit the disease. You do have to have droplets in the atmosphere. It's obviously a communicable disease. And you will see that in some of the data here. But also, you will see that it is still largely a Chinese problem. But it can easily migrate to other parts of the world. So if we go to the first, why don't we start with the travel alert? Now, the picture is frozen on my screen, but I don't know if you can see me OK or not. Yeah, we were looking at NCOV, Health Alert, Fabulous. OK, great. Let's look at that one for starters. So I actually just have a personal story. My son came out of Nanjing about 10 days ago, 12 days ago, and met my wife and I in Honolulu for his holiday. He got out, and into Hawaii, there was no checking. No one checked in. He's back home in Washington. He's postponed his return to Nanjing. And he's completely asymptomatic. But during the time he was in Hawaii, the government began to ramp up more controls and reviews. And you could just see, well, there's a lot of people like him who came into the country who were under the net, if you like, before a lot of these controls had kicked into place. I think that, and I'm sure this is the advice your experts are giving you, wash your hands. It's unclear how good these masks are unless you have a real sophisticated mask, but do all the common sense things that you do for the flu. I can have a twin brother, actually, that works with big data in the health care field. And he was telling me he thought that there was underreporting of the data and that the strain might be much more lethal because of the underreporting in China. And if we go to the next slide, you can see it as a very traditional, the global spread of the coronavirus. And you can see here it has a very kind of traditional movement of a pandemic. It rises at a very rapid rate. By the way, this is, as we say, chump change compared to measles, apparently, kills about 150,000 people a year. And we have a vaccine for that. But I think the big concern about the coronaviruses, we just don't know enough about it yet. There could be misjudging these lethality that may be too low, too high. And there was a report. There have been two or three reports that Tencent, the monster technology company in China, probably one of the biggest companies in the world, had been posting data that was contrary to the government's statistics. And this data showed the number of cases and the number of fatalities. Probably 10 times as high as the official data, but they quickly changed it. So I do think we're still entering a period of time here where we don't have a good handle yet on the scale and scope of the disease. So this is a- People who are trying to make a vaccine, which would ameliorate the epidemic, say that it's going to take at least a year to do that. So that's a big- Yes. And that is- Right. And look at the nature of a virus like this. I think the unrestrained aspect of the virus is really simple. There are some people who only have a mild cold and they recover pretty quickly, but they're carriers. There are other people who are vulnerable and they don't recover so fast. And there are other people who are very vulnerable and they die. And I said, Right. A high percentage for this, I think. We don't know exactly what the- So the initial data on the folks I spoke to is that- So, and of course, a lot of this is the denominator, and the way we collect data, both in the US and China, but I think health experts in the US would say that the death rate from the flu, it hits very young children of babies and old people that are already ill who are old and the death rate, but it's not, it's probably well below a half a percent. Part of this is if you've got to collect the right data on the denominator and that there is some data out there that suggests that while the deaths appear to be low, it's lethality may be as much as 44 times higher than that of the flu in the US. And that's within China, we're probably not getting a good measurement of everybody who's got it. And we may, so right now we may be overestimating it's lethality because we're seeing the number of people dying, but there's probably a lot of people who have a mild case who are afraid to go to the hospital because they're gonna get quarantined or locked up. So I do think this is very typical of the early stages of these kinds of problems. We tend to probably underestimate it's lethality and it's problem on the other hand, the markets tend to overreact, at least in the beginning. And I think that's what we're seeing now in the oil market. Well, let's talk about, go ahead, go ahead. We know the travel industry has taken a big hit already. Oh, huge, huge, huge. A lot of flights and tours have been canceled, especially those dealing in and with China. And there's probably a lot of concern all over the world as to what is business now. Optimism leads to more investment, more activity and pessimism doesn't, the old story about markets. And I mean, I don't think it was out of line for the market to drop 600 points on one day last week. And it's come back since, remarkably. Yeah, yeah, but I do think that over time it'll probably decline until this is resolved. But you know, the one lesson that might be good that comes out of this, which is, we don't benefit in the West if there's a major calamity in China. We need China to be a prosperous country. Absolutely. There's over a billion people there. They're fantastic consumers. And it's not, and so this goes back to the issue of trade wars, whatever you want to say, our relationship with China is not one in which we win if they decline dramatically. If they decline dramatically, it's bad for all of us. Yes. And I think actually I'm almost sensing that the Trump administration has got that message. I mean, I think Trump has reached out to Xi on several occasions. The U.S. is already shipping a lot of medical equipment and testing equipment into China. They've opened up CDC resources to China. So I actually think the Chinese, you know, they do have all these characteristics of autocratic regimes and trying to hide data and everything, but they're handling this a little much better than the SARS. I think we're learning a lot more a lot quicker than they did under SARS. There's plenty of criticism brewing though about how they kept it quiet for a month. Yeah, yeah, yeah. As I say, it's the nature of autocratic regimes. Yeah. And the problem is that what they did before, which is now being criticized, leads to an undermining of their credibility. And so this is in a very sensitive stuff. People are worried about life and death. And if they don't believe the government because of what happened before, that undermines the effort to resolve the crisis. And so there've been a lot of articles and I've seen video interviews where Chinese people have spoken out against the government. And I really believe though, Lou, I believe that the government is turning more candid and the people have got to come along on that, including the Chinese people. Oh, I agree, I agree as well. And, you know, China's a big piece of the world oil market. If we go to the question of bread crude oil price, which is the most classically traded price of oil in the world market, it gives a good sense what the price of crude is across the whole world. You can see that by February 20th, the price of crude oil dropped to $54 a barrel. This is largely, but not entirely, a massive drop in jet fuel demand. It's just a kind of catastrophic effect on the revenues in the oil industry, as well, of course, as refineries and the whole energy complex within the world. And it's not really good for US producers either because we export a lot of oil and gas now. So the economy is slowing down. I mean, people, there's a linkage, right? It's been an economy in demand for fuel. So if it's slowing down, that is gonna be a lower demand. And therefore, the production and consumption both go down. Right, right. So that's, you know, these lower prices, I think it is important to understand that historically when the price of oil fell, it was clearly a net positive in the US economy. But the US is a net oil export. Not an OPEC country, but it is. And when you have a decline in the price of a major export of a country the size of the US, that has an effect on economic activity within the US. So some consumers will benefit from lower gasoline prices. But big segments of the American industry will suffer. So it's going to affect the performance of our economy as well. So far, I don't think it's... To me, to me, the question is, so we know there's a matter of, I'm gonna call it, textbook economics, that smaller demand is gonna create a reduction in price and all that. The question, and this is a hard one, is where are we gonna go from here? Let's assume there's all the medical people are saying this. It's not gonna be resolved right away. It may spread in China and outside of China because of border crossing that have already happened. You have a long incubation period and it's communicable while you're asymptomatic. This is a recipe for global involvement. So my question to you, this is a hard one, how are these phenomena going to be affected if, say, this lasts for 90 days or six months or nine months? What are we gonna see around the world on the same issues? Well, let's take a look at a narrow thing. What happened to aviation over previous outbreaks? We have some data on that. And if you look at the next slide, it shows the impact of outbreaks on aviation. And basically what this data is, is something we call RPK, Revenue Per Kilometer, right? And of course, there are lots of other sectors, hotels, tourism, general commerce, shipping, but this is an area where we do have some fairly good data on how previous outbreaks affected what we call Revenue Per Kilometer, which is our kind of proxy measure for what's happening to travel, okay? And you can see that in the avian flu of 2005 and the avian flu of 2013, its effects were relatively modest. Mayors, which was this Middle East disease in 2015 did hurt, rather than you can see a drop from an index of about, let's say 95 down to 85. And then SARS, SARS was actually quite devastating. It dropped revenue nearly in half, right? Within three months. And you didn't get back to where you were to almost eight or nine months later. So that was in 2003. So I think that, not saying that's the outcome we're gonna see here, we just don't know yet. Don't know yet, but I think this does tell us that we could be in for a very rough ride. Companies and businesses, which are, you know, have some cash stashed away. They're in a position to make the right adjustments. We'll be able to survive this. I don't know if you saw an announcement by Cathay Pacific this morning. They have announced to all the staff that they should plan on taking up to 90 days of leave without pay over the next six months. So they are really bearing down for a long siege on this thing. Now, what comes to you also, I think, is that Cathay, if they paid the staff of this 90 day period without any revenue, they would be in deep financial trouble. And that's, I think we're gonna see some of these companies that are dependent on travel, tourism, transportation, are really have to do something because otherwise they're gonna be belly up. And that's a great concern globally, don't you think? I think it's a very big concern because if you start laying off a lot of people without pay, you're going to begin to shift expectations on consumer behavior, for the effect of investment. So it is in the interest of all the major industrial economies of the world, including the Chinese and our Asian, large Asian and growing economies to get a handle on this as soon as possible, right? We need to figure out how to get this under control quickly. And this says the Chinese, with their somewhat autocratic system, may be doing a good job eventually because they have the ability to order around people much more than we do. Well, I was impressed with the Chinese because very early in the game, they sent a bunch of scientists out to identify the genome and they sent the genome all around the world for other scientists to look into how it could be treated and create vaccines. So that was a good move and hopefully there'll be more moves like that. Yeah, and you might take a look here also at this last slide where how the coronavirus can affect commodity markets. Generally, these are two graphs here. One is the price of crude oil and the other is the price of copper. And you can see here that it's been, you're seeing a rather dramatic drop in both the price of crude oil and the price of a major industrial commodity called copper. And yeah, this makes these commodities cheaper but these are not cheaper through technological advances. This is strictly supply and demand. This is strictly the demand for these major inputs into the performance of modern economies is just dropping like a stone. And it should be a warning to the Trump administration, to the Congress, to all the major economic leaders around the world that they need to get their hands around this as soon as possible. Yeah, and that puts a serious burden on the US because we do have the medical and research facilities. Exactly. We have to take advantage of them. But you know, one thing, and it's all sort of in between the points you've talked about is that this affects people's sort of a socio-psychosocial sociological effect in the world. And I think that when you have a very threatening thing like this, and then you see the result of that threat actually play out, people get down on things. They're unhappy. They don't see a good future. They worry. And when that happens, entrepreneurship and innovation slow down too. And I think that it's a real threat to the world to have a serious epidemic like this where there is no light at the end of the tunnel. So that's your solution to put the end. I'm sure, and I'm sure this is a heretical statement, but I'm going to make it anyway. You cannot put all your brain power in one area. We cannot put all our brain power on climate. Okay, we need to put some brain power on climate a lot. But we can't put all of it into climate. We have to let this brain power get into other sectors. In the medical area and basic research and everything. And my observation has been in the last couple of years is that it's very tough. You know, I was at a bar in Honolulu recently and I met a young man who was a brilliant researcher working at teaching at UH. And he was involved in finding offshore groundwater. And I said, well, that's fantastic. He says, you don't understand. There's almost no interest in it. There's no money in it. There's no research support for it. Because if you're not working on climate, all the foundations, all the government agencies are not interested. And so I do think that we need to sort of think about this very carefully. How do we allocate our resources for brain power? Because we need people to work on things other than climate. We need people to work on climate, but we need them to work on other things as well. Well, that's my little hobby horse for today. So at the end of the tunnel, when we come out to the other side loop, how is this process, you know, the epidemic, the threat, the psychosocial reaction to it, the economic reaction to it, going to affect the energy markets on a longer-term basis? Certainly. I think if this is a one-off thing, if this is a one-off thing, I don't think, look, people like to travel. People are getting richer. They like to go see places. And once, I believe that as in the past, as the data showed on revenue per kilometer, once they get this under control and everybody gets comfortable that it's safe, that there's a vaccine for it, I think we're going to go back to, you know, the ex ante world in which there's a world travel will continue to grow, tourism will continue to grow. So the real role for governments now is to get a lot of smart people to cooperate with each other and to get the research underway, understand the basic fundamentals of this disease and both get a vaccine and then learn how to get it in control as soon as possible. And as for the rest of us, we have to watch this carefully, even if we do medical research or supported, you know, economic. Exactly. Right, exactly. We have to be informed about it and we have to watch the markets for that matter. And one guy told me this week, he thought this was in a strange, bizarre way. It was an opportunity because whenever he saw some kind of problem in the market, you know, that results from this sort of epidemic, he would identify the stock and buy it, which I thought was a big one. So for individual investors or hedge fund managers, okay, they could make some money and that's part of the nature of markets to move cash where it's needed. But that's separate from the public policy point of view, which is where's the responsibility of governments? And if you're looking for an area where there really is a consensus that the government has a very important role, it's public health. Right. It's public health, it's epidemics, it's vaccines. This is an area where the government should be, should be well-equipped and able to do a good job. And I was impressed with the HHS leadership team that held the press conference, you know, Fauci and all the guys from CDC. We do have some good people working on this here. I'm concerned we don't have enough. But at the top, I was very impressed. These guys were on top of it. They had a lot of good ideas. And you had no doubt that they were gonna go work and they were gonna put a maximum effort to bring this under control. You got the same reaction. And I'm taking from what you said a minute ago, and I think one point is very clear. And we live in a complex world, an interconnected Thomas Friedman kind of world, a flat world if you will. And we really do depend on China and so many other places for a balance and a global balance. We're all in this together, one big global family. And that individual person has very little effect on it. Governments have more effect. The government of the United States has more effect. And so even if you thought we should reduce the size of government, reduce the initiatives by government, this is a reminder that only government can solve this problem. There's no white knight coming out of left field on this. Government- No, this is a role for government. This is a great, this is an appropriate role for government, right? Yeah. Government does a lot of silly things. This is the area where we should be having plenty of resources and plenty of brain power. So drilling down one last question, Lou. Sure. You're in Japan. You made the trip. There's a certain amount of risk in all of Asia, but you made the trip. And you're presumably at a conference or some sort of energy event. How do you feel about this from that perspective? Being there, making the trip, following what's going on, looking at the markets. Are you optimistic or pessimistic? My problem is I'm by nature an optimist, right? So I am optimistic. I think the more people I meet, the more people I see in all these different industries and sectors, there's a lot of people, you know, trying to do the right thing, making things happen. You look at Japan as a very easy place to visit people or a lot of people are wearing masks. That's extremely clean environment. It has, I think it's in size, it's vulnerable population is very low. I mean, it's got good medical care. So I'm not, you're asking from a personal point of view, I don't feel at risk coming to Japan. Well, thank you, Lou. It's great to talk to you. Are you gonna be coming back the next couple of weeks? I'd go home on Saturday. And we can talk two weeks from now. We can, we can. Think about your trip and about what happens in the interim, yeah. Yeah, and hopefully this problem will be fixed by then. Yeah. Thank you, Lou. Okay, thank you, J.L.A. And Sayonara. Sayonara.