 Okay, we're back. We're alive for a special show. What we call a squeeze show. That means it's very important. This is energy in America in the off-week. Lou Plirisi of the Energy Policy Research Foundation in Washington, D.C., who's going to talk to us about oil prices and their effect on the global economy. And we sure know they've gone down dramatically. Hi, Lou. Thanks for joining us today. Good to be here, Jay, as always. So what is the extent of the drop? And what does it mean? So yeah, first let's talk a little bit about that. World direct value of oil and petroleum products. Yes. And I'm not talking about the guy working in the gas stations. And I'm just talking the direct sale of the primary commodities, oil and gas, about $4 trillion a year. If you drop the value of that by 25 percent, that's a trillion dollars. You might say that's a trillion dollars in loss of value. But it's also a trillion dollars of a shift between producers to consumers. And I think we should kind of put this into context. From the start of 2019 until February 2020, the North American stock market ran way up. The S&P index rose 35 percent. NASDAQ wrote 48 percent. Dow Jones, Dow Jones. And so we've had a big retrenchment. People are very nervous about this drop in oil prices. Not as if it's just a standard transfer of, okay, the producers lose, but the consumers gain. And I think consumers are gaining from this drop. For example, for the airlines, jet fuel prices are way down. So this is going to help take some of the pain. But as we just heard, the president just announced halting all European flights into the United States. Except the UK. Except the UK. That's a huge problem. Now, I don't know if you can transit through the UK from other parts of Europe. It's quite a shock. And my personal view is this is a serious infectious disease, but we're going to have to kind of accept at some level that we're going to have to manage it. We're not going to be able to stop it entirely. And large numbers of people are recovering from it. So I don't know how we work our way through this, but I do think that the decision of the Saudis actually to announce that they would produce more oil, that they would drop their official selling prices and combined with the demand, huge demand reductions were seen as a result of the coronavirus is actually a double whammy of a shock. You know, years ago, you could say, well, this is bad for the producers and good for the US because we were a net importer, a very massive net importer. But we are actually a very, as I'm going to show you in some slides, a very large net exporter now of oil and gas. So we're going to lose a lot of capital investment in the oil and gas business in the next step. Already we have a lot of companies and particularly in the unconventional resources and the Permian Basin or Dakota, we're operating on very tight margins. We're going to see some bankruptcies. We're not going to lose the oil. It's still going to be in the ground. But it's not like, you know, it's not like 20 years ago. Well, it's particularly painful because because the, you know, the oil companies have just recently invested a lot of money into infrastructure to make all this happen, right? And now fresh out of that investment, they have no return or a smaller return. Yeah, I think that this is so it's not so much. So of course, the Saudis are the Saudis have made a run. You could argue at the shale producers before, but they're very diverse group. They're very resourceful. They've shown a capacity to drop their break even costs. And I would say each time they went through one of these downturns, they came back much stronger and financially see more capable. Now, for years, I think the industry did benefit from investors willing to look at growth and quit worrying so much about capital discipline. But I would say in the last 24 months, many of the companies now have found their investors saying, Well, we've had to invest in growth. Now we want to invest in return. And so you have a lot of strict discipline taking place in the industry now. And it's going to be a very tough road ahead. When you say that a lot of these companies are going to go bankrupt or consider some what does that mean? What does that mean? How does that affect us? Well, if you have a lot of large scale bankruptcies, and I'm sure we'll have large scale, we will have some companies going through a start time, we'll have the big oil companies coming in and buy some of them. That's not so bad. They operate very efficiently. But I do think that we're going to see a downturn in US production if these prices stay. And we may over the next year lose a million barrels a day. And so if we go to the, let's look at the one day drop in oil prices and see where it fits in. So I think it's important to understand this is not the first time this has happened. In 1991, we had a massive drop in oil prices. 2001 and 2009, we also had large declines. And actually in the 2000 and the 2000 drop, we did see some adjustments in oil up it because by 2009, shale production was under on its way. And you could see a dip that occurred. But this is a large drop. And I don't think it's just about the Saudis or the major Middle Eastern oil producers trying to drive the shale guys out of business. I don't really think they can do that. I think the nature of the shale production process is that, yeah, they may slow down, they may park the rigs, they may lay people off. But the resource is still there. It's a short cycle kind of investment. Soon as prices come back, they'll come back. I think it's really a attempt of the Saudis to get some cooperation from the Russians. And actually, I'm almost thinking the Russians may have misplayed this one. They may have thought, well, they'll play hardball. And the Saudis will do all the heavy lifting. And the Saudis said no. And I remember they did this in the 1980s. Everyone kept thinking, well, the Saudis will cut, they'll carry all of us. And then one day the Saudis said, no, we're not doing that anymore. Price of oil at that time was about $36 a barrel. I would say this is $84, 85, 86. It dropped in half to $12 a barrel. So this isn't anything we haven't seen before. Now, if you go to the next picture. Let me just ask about that. So at the end of the day, the Saudis have stood fast in their play with Russia. And they have increased production and thus price of oil has gone down. But what about Russia? What's the effect on Russia from losing that foray? So I think for the Russians, it's clearly going to make their imports more expensive. But since their production platform in Russia is based on the ruble, the ruble just will depreciate. It has already started. It has to appreciate it remarkably. And that helps to keep their costs in line domestically. But it does mean really the value of their production has fallen. And you could argue that they can adjust to this and they have it. But it means that there are going to be substantial losses of income, wealth, and the budget for you figure the Russian government depends upon 30% of its budget from oil and gas. US it's minuscule. We are very large economy. Oil is important, but it doesn't define who we are. So it's going to have a bigger effect on the Russian economy, because the share of the Russian economy represented by oil and gas is definitely going to affect the budget and the budget. Now Putin right now is trying to get a constitutional amendment through which I think you succeed, which will essentially give him the same position as President Xi in China. But if he gets to stick around, so so I think that that's one issue. I do think though, but if you look at I was looking at this for the years, what does this mean to kind of consumers? Yes, the drop in oil prices, though, will give some help to consumers. I think for the driving public alone, it's worth about $35 billion a year. So it's bad on some aspects of the economy, but there are some benefits, jet fuel, gasoline prices, and the drop is probably going to show up of a price drop. You'll even see this in Honolulu between 25 and 30 cents a gallon. Now, you know, you know that the cheaper the cost of energy, the better the economy. In other words, low energy costs actually, you know, tend to improve the economy. I mean, they run, they run together. I wonder if that really means anything in this market. If we have cheaper energy costs by cheaper gas, cheaper oil, is that going to help the economy? I mean, if you're if you have constraints, like you can't fly anywhere, I mean, if you're quarantined, you know, you're really not going to drive around the block. And even if you're not quarantined, how much more can you drive in the short run? These things take time to filter through the economy. So I hope our policymakers understand that I understand coronavirus. I mean, the Saudi play is something it happens from time to time. We can adjust to this. But I, you know, my personal view is I'd say even my own family don't agree with me. We are overreacting to the coronavirus. I have a lot of friends that think I'm crazy. But you know, we we have a massive amount of people catch the flu every year in the US. We have quite variations from year to year in the survival rates of the flu. But there's something about this coronavirus that creates a level of fear, I think that's out of proportion. I'm not saying it's it's not serious. But it's having almost no effect on young people, according to the data out of China and data out of Italy. It's mostly affecting the elderly people my age, you know, or have impaired immune systems. And yeah, okay, we should do a lot of reasonable things. But guess what? We have lots of viruses out there. And we're going to see more. Now, I think a lot of people are very concerned. They said, well, the infection rate is very high. We have to pull out all the stops. But I do think somebody in the somebody in authority needs to do some careful thinking of what is the cost to the health of society if our economic growth rate declines in half. If tourism dries up in Hawaii, what's the cost of that? I bet you the cost of that's a lot higher. You just can't measure it very well. So I bet you that health shows up in shows up in people's health. And they're described to the notion then don't get too excited about this. Then my view is do all the responsible things you can do as a society have a lot of testing, try to quarantine people in place. If they catch it, try to test a lot of people, try to limit the amount and the pace of the rate of infection. But it's not the bubonic plague. Okay, it's not the Spanish flu. So what you're really talking about is it isn't necessary to stop all the flights from Europe. It isn't necessary to cancel all these conferences and events all over the country. It isn't necessary to cut to cut air service. I'm sure I'm in the minority on this view. Okay. And I understand I'm in the minority in you. Believe me, a lot of people think I'm crazy, but I don't think I don't think this makes any sense to me. You know what, though? I mean, I've heard this view, you know, from many people actually. But the reality, Lou, is that it's happening. The reality is that people at the individual level are effectively panicking. And businesses are effectively panicking. Very serious. Yeah. And so it's a public confidence and a business confidence issue. And that's the market. That's the way the market works based on confidence, no? Absolutely. The expectations are what's driving everything now. And, you know, we did a paper way many years ago about oil prices running up very high. And our view was that was entirely on a set of expectations that people had on new production that did not happen. Now we're going through a set of expectations. And actually, I think we could get a very strong recovery if the rates of infection slow down and people calm down a bit. But so far, I'm not seeing that. But the other thing to think about that no one's thinking about is that these low oil prices, you know, they have an effect in the US. But what about Mexico, Brazil, Colombia, Argentina? These economies are going to take a huge hit when these prices fall. And they're not going to adjust very easily to it. So I think we're in for a rocky road. Hopefully this thing will start to bait. And we can go back to kind of normal terms of business and lifestyles. So one of the things you said is very intriguing to me is that once we get out of the panic phase, once we can feel more comfortable about the virus, once the number of cases decline and we have some scientific advances, then the economy, quote, will come roaring back in, quote. How fast is roaring, Lou? Well, you know, hopefully it's inverted V, you know, that means it came down hard to come back. There's no, there's nothing fundamentally wrong. Your first China is coming back. They have got it under control, I believe. Now, they still have lots of rules. You have just long social distance at work. But I think the supply chains are coming back up online. But I do think that expectations are, it's the uncertainty. People have a hard time dealing with uncertainty. And frankly, I do think the media has hyped this or not failed to put it into perspective. Let me put that up for you to say that. I don't think people have a good perspective on it. Life has lots of risks every day. You can, lifetime risk for driving an automobile is a 1% chance of dying. We have lots of risks we face. And the question is how best to manage them in an intelligent way. And the panic that's going on now. You've seen these videos of the people buying toilet paper at Costco in Honolulu. It's ridiculous. It has nothing to do with the coronavirus either. Nothing. No, I have no idea what people are doing. Well, it goes back to the shipping strikes 1946, where there was a shortage and such things and people, you know, you know, went board every roll of 12. So let me ask you about Saudi Arabia. You know, after they reduced, they increased their production and thus reduced the price. And it had a, you know, an accelerating effect on price reduction around the world. How does the Middle East, how does Saudi Arabia and the Middle East, you know, what is that effect on them? They're going to lose. Well, I think it's a problem because, you know, there is this data from, called break even price that's calculated by the IMF and the World Bank. And it's not really like you and I would think break even price, which is, what does it cost to produce the oil and what do I get for it? It's a kind of social break even cost. And what is it, how much money do they need to run the budget? And I've always been so much suspicious of this because I have a break even price for my budget, but if I have less money, I just get by on a smaller budget. But that's apparently not how they think about things in the Middle East. And yes, I would say we have some data. If you look at Saudi Arabia and the Iraq and the Emirates, most people think, most analysts think they need somewhere between 60 and $80 a barrel to meet all their social obligations. So this is not a sustainable strategy for the Saudis either. And my view is that what the Saudis are doing is look, we have the stamina, we have the resources to do this for a while, maybe a year, maybe two years. We don't really know. And that you, the other producers, particularly Russia, some of the other OPEC producers, you don't have them. So you need to cooperate on helping to manage this market. So I think that's what the Saudis are trying to do. We'll see how that goes. It's like who blinks first. It's like a game of chicken. Right. I think the Russians did set a statement out today saying, oh no, we don't want to go to war over this. The door is open for discussions. So. Well, do you think the decline of the global economy will bring the parties to the table? Yes, I think it will. I think it will. That'll be a positive development. The real question is what's the long run price of oil? It's probably not 20 or 30 dollars. It's probably closer to 50. By the way, one thing I know is dear to your heart. New data shows that electric vehicle sales as a percent of light duty vehicle sales has continued to fall now for almost 12 straight months, accelerating with the fall in oil prices. But wait. That doesn't seem to be consistent with the notion if you buy fewer electric vehicles and use fewer electric vehicles, that maybe you go to fossil fuel cars and you buy them instead, thus increasing the consumption of gas, no? So I think this is exactly what the Saudis have in mind. They're attracting new cars that are fossil fuel cars. I haven't seen it yet. Someone said that the Norwegians have just now required EV drivers in Norway to pay road tolls and apparently EV sales in Norway are collapsing routinely. Well, one question I would ask you that's sort of inherent in this whole discussion is we are in a transformational period and it's traumatic in many ways economically and maybe medically true, of course. But when we come out the other side, however we come out the other side, because every pandemic ends at some point for one reason or another, it will end and the markets will stabilize. I'm not sure they'll climb right up, but they'll stabilize anyway. So the question is when we get to the other side, how will things be different? How will those things be different, for example, electric vehicles? How will they be different in oil prices and production? How will they be different in the global economy and in the geopolitical? I know that's a question you could take some time to answer, but how do we react to that question? So I think how they'll be different is, one thing they'll be different is renewables, not entirely, but it's somewhat of a rich man's game and cheaper. They're cheaper than fossil fuels, but that's actually not true, right? I mean it's true. It's true at relatively modest penetration rates in the utility sector. Natural gas is quite catchy, and I do think one of the, and you look around the U.S. you can see this in the rejection in some of these initiatives. I think there's so-called transportation climate initiative in the northeast, which was aimed at increasing gasoline prices. So what I would say is that when you go through a period of economic stress, it is politically difficult to do the things you're going to want to do, which is increase the cost of fossil fuels, because if the public is hurting, they're not going to want their political leaders to do that. So I think there's going to be a rough go for the petroleum industry for a few years. I think it's going to be a harder road for the renewable industry as well. The other question pops up is, I'm sorry, I don't want to interrupt. Go ahead. The other question that pops up was, you know, we talked earlier about investment. We talked investment by the oil companies, investment by everybody in the landscape. But when you have a period of uncertainty, as you mentioned, certainly this is a period of uncertainty. That's the certain thing about this period. It is certainly uncertain. So my question is, who is going to make serious investment, you know, of billions of dollars, as might ordinarily be the case, in moving, you know, the energy, sector energy infrastructure. So if you're a major, if you're a major oil company, like ExxonMobil or Chevron, you have a 30-40 year horizon. You're, you don't like this. This is a bad outcome. You have a period of turmoil. You cut where you can, but you invest through the downturn, because institutionally you've learned to do that. You've learned that, you know, you have a long run view of the world, and yeah, you adjust to it in the short run. You try to cut where you can, but you also look for opportunities to consolidate, to get more efficient, to buy more assets. So that's what I think will happen. This is going to be over in three to four months. I mean, the scars will remain for a while. It's going to be over. Well, Angela Merkel said that, I forget the exact numbers, but I recall she said something like two-thirds of the country will be infected, and of those two-thirds, there's a certain demographic over the age of what, 65 or 70, who, you know, as it stands now, medical science will not be able to protect them. They will die, and this will keep on going and to the extent that there is panic now, there'll be increasing panic if her prediction is correct, and her prediction may apply to all of Europe, and her prediction may apply to all the United States too, because you know, we are losing. We lose. I looked at the, in fact, the CDC website is absolutely fascinating, and I would look at it. You can see variations in hospitalization from the flu year on, year up, from 4% one year going to 11% for a certain demographic, let's say population 70 and older, whatever the number, they have it in the CDC site. So yeah, we have huge variations. We lose lots of people to the flu in the U.S. I don't know the number. It can be anywhere from 15,000 to 40,000. It's not like no one dies from the flu. But my point, though, to address your your thought about how this is going to be resolved in two or three months, I mean, I don't see a medical breakthrough in two or three months. I don't see a vaccine in two or three months. Maybe people get, you know, sort of get used to the idea of panic, and thus that makes panic less panicky. But in terms of the other factors on the stage, it would seem to me that as we go forward, the same factors that have driven oil prices down, that threaten the global economy, that threaten the demographic for older people, are going to continue. So why do you say in two or three months it'll be resolved? Because we have this experience with Ebola, MERS, swine flu, and maybe this is so different. But that's the only historical record we can look to. And all of those went through a cycle. But eventually the cycle played out. And the cycle for this will, I think, play out as well. We're going to find ways to either accommodate it or limit its contagion. But we will do that. This reminds me a little bit about the time where everyone said after the first Gulf War, it was going to take three years to put out all the fires in Kuwait. Yeah, that's what it looked like. It looked like an impossible job. But, you know, we have a lot of resourceful people in this country and other places. And they were able to put out those fires in four to five months. So, you know, we learn as we go along. I hope so. I don't think we should be so pessimistic. So what is your advice to the government? What is your advice to the nation on this? Aside from, you know, not being so pessimistic, what affirmative steps would you recommend in order for us to deal with it, both on an energy basis and on a global economy basis? So if it were me, I would have a system to... I think the CDC was remiss and not having. They should have, you know, got the FDA out of the way. It's like, look, you need to buy the kits from Europe, buy them from Europe. I don't think we should have over-regulated the kits for testing. We should do a lot more testing. We should have research unable to see if we can detect it on people who are asymptomatic. If someone, it has a fever and they're likely to recover. Most people do recover. They should stay home. I think, yeah, you may, if you have certain compromising symptoms and you're of certain age, you should probably avoid large crowds. Not, you know, not engaging too much social activity. And then go about our business. I just don't think... I agree that, you know, if you see what the Chinese done, did, and they looks to me like they're bringing it under control. We don't have that kind of authoritarian capacity in the West. We're not going to do that. We're not going to lock, we're not going to go to people's homes and take them to a quarantine center. It's going to happen. Well, we're going to get to talk about this at least a little bit next week, Lou. And I suggest to you that there will be changes to, you know, to maybe change our thinking or at least include in our analysis next week. That's Lou Pugliarisi, Energy Policy Research Foundation in Washington. Talk about energy prices and how they are affecting the country and the global economy. We are so happy to be able to talk to you today, Lou. Thank you so much. All right. Take care, Jack. Take care. Wash your hands. Yes.