 and Wednesday afternoon and we have the joy of having Luke Fulgerici right here in our conference room nearby our main studio here at 1164 Bishop. Welcome to the show, Lou. So nice to see you and have you in our conference room. It's great to be here. A lot of things going on these days. I mean, for example, let me ask you first, we have we have various positions that would change fuels, both the conventional fuels and for that matter, renewable fuels that are being taken by the various candidates in the democratic side. And I wonder if you can review those and how they are affecting or will affect American, well, global markets on energy. Yeah, I think that's a good that's a good intro to this topic. What I want to do for the first couple of pictures I'll show you here is give you a preview of forthcoming effort report, which will be available to anyone who just goes to our website. And that report is entitled economic and oil production consequences of the of a total ban on the use of hydraulic fracturing for the extraction of oil and gas. As you know, hydraulic fraction fracturing is among some people viewed as a controversial method for extracting oil and gas. Oh, often 10 to 12,000 people on the surface from so called source rock or shale, shale provinces, often which entails the use of very high pressure water and small bits of sand or other particles to open up these very dense rocks to allow oil to flow to the surface. And it's really been pioneered in the US and it's one of the reasons why today the US is a net exposure of oil and gas to the world market. It was a remarkable turnaround. And so I think a lot of the candidates, particularly the Democratic side or entirely the Democratic side, and including Elizabeth Warren and Bernie Sanders have called for the immediate cessation of all use of hydraulic fracturing. So one of the things is to try to look at what does that mean for the Americans for the United States? What does it mean for world oil prices? And generally, you know, what what are they trying to achieve from that? And is it is this sort of juice worth the squeeze, as we like to say. So that is really what I'd like to start with. Yeah, well, what effect would it have if we stopped those operations? Yeah, so let's take a look at the first picture here. I think the first was just a this particular one shows us the what's happened to US crude oil production now, both conventional and unconventional from 2000 to 2019. And the blue is really what we call unconventional. Those are resources largely in places like New Mexico, Oklahoma, Texas, North Dakota, Pennsylvania, Ohio, which have been very responsive to the use of this hydraulic fracturing technique. And you can see the rapid run up in US oil in in sort of crude production, by around six million barrels a day to over 12 million barrels a day. And this is before we include something called natural gas liquids, natural gasoline, the liquids extracted from natural gas production. It doesn't include gas production or biofuels. But when you add up all the numbers, the US is a net exporter. So one of the interesting things about unconventional oil and gas production is it's a much very much like a manufacturing process, you have to keep investing. So excuse me, so the if you were to hold the hydraulic fracturing process, which is the only way to get these unconventional resources, you would have a very rapid decline in oil production. In other words, without continued investment much like a manufacturing process, they would begin to decline at a very rapid rate. So if you look at the next picture, which is and you can see how fast this happens, right? So this shows the estimated decline in oil output from a decline of high from a bad and hydraulic fracturing. And you can see that within within just a couple of years, there's a kind of catastrophic drop off in US oil production, particularly from the Permian in Texas. One wonders whether Texas would even remain in the union should the federal government succeed in banning the use of hydraulic fracturing. This would be a devastating thing to the to the Texas economy. It also has a very devastating effect on jobs. As I show you in a minute, also will increase the cost of oil and gasoline oil crude oil represents 60 to 70% of the cost to gasoline. And it will drive those prices up. Well, let me ask you this, you know, like, it's clear that climate change is upon us. And, you know, you have, we have signals of that coming from Hither and Jan in many places in the world, it seems like these days. And there are those who who would support, you know, Bernie on the basis that we need we need to cut off all fossil fuels right away in order to save the planet. So I don't I don't want to make you a candidate for president. I think we've already discussed that you've told me you're not going to do that. But if you were a candidate for president, how would you answer that argument? Oh, first, the first thing I would say it's generally a bad idea to chop your head off to address a headache. So this is so this is really not the right approach. Because like lots of things in life, they come with various kinds of consequences. Some of them are positive. And some of them are negative. But a massive ban on hydraulic fracturing first, politically, I just don't think it's going to happen. I think it would be very difficult for a president who wanted to do that to even get the legal authority to do it. But a president could clearly shut it down on public lands for which there isn't a lot, you know, probably not more than 10% of the production at the most. I have no idea what the number is yet we're looking at that. So the first thing I would say is look, this massive increase in oil and gas production in the US has been a huge economic boom to the US. In addition, which we're not talking about, but we have a similar kind of consequence for natural gas. The gas, the prolific supply of natural gas has driven out the use of coal. It's been a net gain in terms of emissions. In fact, one of the consequences of a ban on hydraulic fracturing would be relatively substantial uptick in the use of coal in the electric power sector in the US. So how I would answer that as a president is look, we need a long-term strategy that gets us on the gradient that transforms us to the fuels of the future at some pace. Maybe faster than we're going now, but it can't be done overnight. Oil and gas in North America is worth a trillion dollars, four trillion dollars worldwide. You're just going to have to take some of the fruits of that economic growth and apply them to research and new technologies. And perhaps you put a price on carbon. But these kind of talking points that candidates just throw around are really bad ideas because some people might believe them or they may become president and try to do it. Yeah. So are you saying that if we cut it off, there would be a... I heard what you said about Texas and certainly Texas is a center for oil and gas. But do you think it would have a national effect on our national economy? Of course. Of course, we think it would, you know, hundreds of thousands of jobs would be lost. And if we go to the next slide, actually, look at the incremental recruit required from... So how much more crude will we need? Because it's not like they're putting a ban on oil production from Saudi Arabia and Egypt and Libya and Norway and offshore China. There's no discussion of that or Russia, right? So if you were to put this ban in, the increment in additional production that would be needed from world markets could easily be three million barrels a day from OPEC alone. Some other production could come around from conventional production. So it's really kind of, they'll just be substituting more foreign oil for US oil. Of course, it would be produced through conventional means, right? Yeah, that's interesting because there's a global effect also. You create a kind of a vacuum and then the vacuum is filled by other suppliers, am I right? Exactly. And not only that, because you would be reducing the world supply by a large volume, the price of oil would go up anywhere from $10 to $30 a barrel. So if you're paying $340 for your gasoline in the Wahoo in Honolulu today or the notion you would be paying $5 a gallon, probably very quickly. So one of the consequences was everyone would feel good about their heroic climate achievements. They would have virtually no effect on total emissions. But at least we would get to pay a lot more for gasoline. Because then we would use less. If we paid more for gasoline, we would use less. I suppose so. There's a rationale there. So Lou, I get the primary subject of our discussion today is with reference to the phase one of the US-China trade agreement, which was struck a few days ago between the Trump administration and China. And although not all the details have been released, I guess we have enough from the public disclosures to say how this will affect global markets and oil and gas. Can you speak about that? Yeah, I can talk a little bit about that. Maybe we ought to just talk about one other thing because maybe many of the drivers in the Wahoo across the US have noticed that gasoline prices have actually fallen a bit. World crude prices have been declining over the last few days. And this has to do for this corona. I think it's called the coronavirus. One of the concerns in the world oil market today, or if you're an oil producer, is that we're going to start to see a dramatic reduction in the use of jet fuel and the use of gasoline for travel. Because concern over the spread of this potential virus out of China is slowing down world travel. Now, it depends how far it goes. But I would say that oddly enough, the virus is probably doing more for climate than the hydraulic. Thank you for that move. What can I say? That's the bright side of coronavirus. So maybe we should talk a little bit about this phase one of the China deal. And by the way, I think President Trump's trade policy has some people who love it and some people hate it. I do think I'm not really a big fan of this managed trade. I do believe there are structural and serious problems in our trade relationship with China. But on balance, we would be better off approaching the Chinese with a multilateral. Maybe with our Asian allies or European allies. In the end, maybe it would have a lot of the features that somebody like Trump would dislike. It would be a slow process. And a lot of the fundamental issues might get nibbled to death. So on the other hand, it's unclear to me that we're really getting to where we need to go. Although I do think, I must say that if you travel around China or the Middle East, lots of the leadership there are used to people like Trump. They understand how he thinks. So why don't we just take a look at some of the highlights of the deal and so we can kind of outline where the uncertainties were. So as you know, on January 15, President Trump and the Chinese Premier Liu He signed this phase one of the agreement. Now phase one is supposed to lead to a quote, phase two. And phase two is to tackle some of the more fundamental structural issues in the Chinese national economy, including the subsidies for state owned enterprises and the often massive intervention of the Chinese government into the functioning of the Chinese markets. Now, how far we get on that remains to be seen. But one interesting feature of the text is that it provides for the Chinese to purchase U.S. energy commodities and even if you credit what they bought so far, it implies an incremental $22.25 billion of increase in energy imports for the next calendar year. And if you think about it, it's quite a commitment because it's really the equivalent of the Chinese agreeing to purchase a value about a million barrels a day. If you're going to U.S. total production, natural gas like the crude biofuels is about 19 million barrels a day. So it's a big number. It's a big number now. It was how it shows up is not specified in agreement. The Chinese have made a commitment within sort of market provisions. So some of it could be ethanol. Some of it could be crude oil. Some of it could be a range of petroleum products, propane, butane, different components. We don't yet know. That's really the Chinese are saying, well, that's going to be determined by sort of market conditions. So my only guess is that the National Planning Council in China will be signaling to the big Chinese companies to others that they should go out and if they can make a deal, it makes sense to start purchasing U.S. energy commodities. But how it's to be distributed. And also I just wanted the Chinese did not say they would drop tariffs on any of those energy products, but we're guessing that they're going to have to do that in order to get their companies to purchase it. Yeah, that's the interesting thing about this deal. It's not a deal to reduce a drop tariffs on either side. No, there's a lot of postponement of new tariffs. Yeah, yeah, yeah, oh, sure. So I guess if there will there be tariffs on energy that's imported from the U.S. to China? So my guess is, first, we don't know the answer to that is, but my guess is in order for this part of the deal to go through, the Chinese will be reducing the tariffs. They just did not want to make it, you know, as long as they have tariffs on the U.S. side of a lot of Chinese commodities and manufacturers goods, they weren't prepared to say, okay, we're going to get rid of our tariffs, you can keep yours on. They don't think they were prepared to do that. But I think we're going to see how much good faith we get out of the Chinese. And I think that's why we're going to look at that there are uncertainties to the deal. If you look at the last sort of slide or picture here, I think you can get a sense here what those uncertainties are and why it's something you want to pay attention to going forward. I think the first thing is the Chinese officials will continue to stipulate that all the purchases should be market driven. Let's take a look at that last slide. Let's get that up there if we can get it up. Yeah, okay, there we go. China's existing tariffs appear to remain intact, but as I said, I think they will be adjusting us down. The text also gives the Chinese a lot of wiggle room based on quote commercial consideration. The Chinese may come and say, look, we wanted to buy more LNG, but your pricing on that was not competitive. So we're going to have to adjust it here and there. I think the other question is enforcement of dispute resolution. Really, that sort of depends a lot about both sides buy in through a real commitment to phase two. In other words, the dispute resolution process is quite complicated, but that is a feature that the US insisted on that we have a process when there's a disagreement. Some company will say, well, I'm prepared to start a venture in China. I'm shifting some materials, but the Chinese are insisting a forced technology transfer. The company comes back to the dispute resolution process and say, look, this is not what everyone agreed to. We need a process now to resolve this. Because in these cases, we have decided, no, this is not forced technology transfer. We just need to have a full understanding to make the deal work. So we have confidence in the legal system. Yes, but let me ask you this though, Lou. We have the Chinese buying more energy products from the US under this deal. And they need to buy more agricultural commodities. Yes, yes, and more agricultural commodities to take the pressure off the Midwest and all that. There are other implications of that, but the Chinese are buying now energy and agriculture. That's good for the US, of course. We want that. We want to have the foreign exchange and what have you. But what's the, may I use this term, the quid pro quo? What are the, what is the US giving up in order that China would spend, you know, 10s, 12s, 50s, 50s, 50s dollars? We are halting any new tariffs. And I think there's going to be, I wouldn't be surprised to see maybe some, a bit of a relief on some of the concerns about Chinese technology or a different process. I have no idea. And we may see some reduction in some tariffs in Chinese manufactured goods coming into the US. All of this has not really been settled yet. But I think both sides wanted to get this phase one deal signed just to kind of have a process for some confidence building and to see if they can move to so-called phase two. It's a very Asian kind of deal. It's sort of an agreement to agree. Exactly. And the timing is excellent because I'm sure that Donald Trump wanted to roll this out as an achievement on the eve of his impeachment trial. So it makes him look good at the global stage. My guess is he's looking more towards, I mean, I don't think Donald Trump will be convicted in the Senate. I guess there's not the votes for that. So that's not going to happen. But I do think getting these trade deals behind him, this and the US, US, Mexico, Canada deal, getting those behind them is helpful. There is a great deal of disagreement of what has really been accomplished. But keep in mind that there were segments, particularly in the skilled trade, certain industries, certain heavy industries that really did believe. And I pretty much have the merits of what they believe. Really did believe that NAFTA and China were hollowing out this heavy industry and a lot of the manufacturing base in the US. I must say the research today continues to suggest to me when I read it that the problem has less to do with international trade and more to do with the fundamentals of cost and the nature of workforce. And that we have a lot of hard work to do to get the kind of skill levels we need in the manufacturing side to iron out a lot of other cost issues in the manufacturing. And by the way, the low cost of feedstock, such as natural gas, such as petrochemical feedstock has brought about a resurgence in clearly in the petrochemical industry and a lot of related industries which use those sources of energy in the US manufacturing sector. Well, let's go to energy for a minute, the energy effects of this deal without seeing necessarily the connections between the energy part of it and all the other parts either agreed or to be agreed or agreed in phase two or to be agreed in phase two. Let's talk about what we know in terms of purchases of energy and energy products by China. My question to you is how will this affect world markets on energy? Because it's a lot of oil and gas we're talking about. So I think its net effect on world markets is likely to be very muted because if the part of this deal is greater confidence and economic growth in China then it's a great thing for energy producers. There's the fact that we have the instability in the Middle East and relative stability in the US. I mean it was a piece of the paper this morning about how despite all the trouble in Washington, the fact is that relative to other countries and other continents, the US still remains a relatively stable place. And the fact that we go through all this impeachment and all this action in the government does demonstrate that we at least are following some parts of the Constitution anyway. So yeah it's easy to look at the press and get very discouraged. Very easy, I'm discouraged, but we have first great institutions in this country. They don't always operate, but we have a probably one of the highest degrees of contract sanctity in the world. People trust, the courts are slow, they're efficient, all these terrible things about the courts, but they are not manipulated by the political process. That business deals are assessed on their merits. People ended, I mean this is one of the reasons why the US is such a magnet. And it's quite amazing, the US has what, 10% of the world production, 10% of the world population, maybe not even that much. Yet we have over 25% of world gross domestic product. We're an extremely productive society and we're blessed with a kind of huge, a large market, a very efficient transportation system with all the other kinds of crazy stuff that goes on here. We have one of the best places in the world for it to grow business and to grow the national. Well, let's hope it stays that way. Sometimes I feel we're on a slippery slope, but hey, you and I have slightly opposing views on some of these things, but I'm certainly willing to be optimistic as you. And I hope, can you give us one more piece, so Luke, can you tell us what to look forward to as this trade deal goes forward, as the world is involved in some remarkable changes? What should we be watching here? So what I would think, what I would look for, if not the trade deal represent an opportunity for less kind of political or political military competition between the U.S. and China. Can it grow out to an area where we can actually start to bring the Chinese around to somewhat, let's say, reluctance and partial acceptance of kind of Western traditions of business and kind of contract sanctity and greater confidence and investment? I knew it. I knew it, Luke. Despite your denial, I knew I know that you should run for office, and I'm hoping that someday soon you will. We need you in the office. Luke Puliarisi, the CEO of Ebrink Energy Policy Foundation. We are so happy to have you on the show and look forward to doing it again and again in 2020. Thank you so much, Luke.