The Windmill That (Almost) Spoiled Supper

“It's a free society. But don't tell the world that we can feed the present population without chemical fertilizer. That's when this misinformation becomes destructive.” – Norman Borlaug

I read with a mix of bewilderment and predictable annoyance the ongoing coverage by Zerohedge of the natural gas crisis in the United Kingdom. In it, a cascading series of consequences, the severity of which are yet to be seen, are laid bare as the competing forces of politics, science and economics are lined up to produce a lowest common denominator outcome for society. Apologies to the hapless windmill, but How Policy by Platitude and Financialization of Critical Industries by Spreadsheet Ninjas (Almost) Spoiled Supper just doesn’t have the same ring.

Let’s break down what is happening. The push for renewable energy is fine, but it comes at a price, and all too often society does not want to pay – let alone acknowledge – that price upfront. When the bill finally comes due, we all pretend to be shocked at how untenable the price has become. Learning nothing from these mistakes of willful ignorance, we plow ahead with more, continuing a do-loop of insanity that ends only once a crisis generates damage on a scale significant enough to force a confrontation with scientific and economic reality, thus introducing more realistic solutions.

If only we could skip directly to the inevitable.

It is widely known that adding intermittent electricity-generating sources to an electricity grid can substantially destabilize it. As it turns out, the reliable operation of a grid falls into the category of “tough problems that everybody takes for granted.” Electricity sources must be perfectly timed with anticipated demand, which is why utilities have a mix of always-on base load power (think coal, nuclear, and natural gas), mostly-on intermediate power (like renewables) and rarely-on peaking power (dedicated power plants – usually natural gas turbines – that only run when demand exceeds the combination of what the base load and intermediate facilities can produce).

Many of our policy makers govern from platitude to platitude. Most have no formal scientific training, nor have they spent any meaningful time working in heavy industry. It sounds good to be pro-renewable and simultaneously against nuclear energy. It sounds good to be against any new exploration and development of traditional fossil fuels in our own backyards. It sounds good to oppose the construction of new power plants using traditional fuels, no matter how critical they might be to the operation of the grid. It all sounds good, except taken in combination these positions make for predictably terrible policy that imperils the most economically vulnerable among us.

It’s all made worse by the ongoing financialization of our basic industries. Prioritizing short-term efficiency over long-term system robustness, we’ve allowed spreadsheet-dwelling analysts at investment banks and management consulting firms to dictate critical industry strategy. For example, instead of integrated chemical companies that have the capacity to absorb input cost volatility because they can capture 5-10 steps of value down the chain, we’ve sliced and diced unit operations into individual pure plays to placate speculators. The sum of the parts always looks better than the whole on paper or in Excel, except that’s mostly a mirage.

Worse, when a company prudently hedges its input costs or product prices, gains are dismissed as transitory and losses are interpreted as mismanagement. The message from speculators is clear – let us trade you as a pure play, we’ll hedge our own exposures.

It is through this combination of forces that the UK ends up with unhedged, pure-play fertilizer plants shutting down because the wind stopped blowing and they’ve outsourced critical natural gas supplies to Vladimir Putin, threatening the entire food supply chain of an allegedly first-world country.

A modern fertilizer plant is an optimized version of the Haber-Bosch process, which was invented more than 100 years ago. Although few have probably even heard of the Haber-Bosch process, it is a staggeringly important invention that enables humanity to thrive. The plant inputs are natural gas (i.e., methane), water, and air (i.e., nitrogen and oxygen). Out the back-end comes ammonia and purified carbon dioxide. Here’s a simplified schematic, courtesy of Wikipedia:

For a variety of utterly predictable reasons, Europe finds itself in a natural gas supply crisis. Utilities are scrambling to make up for an unexpected shortfall from their wind energy assets and are hammering bids into a no-offer natural gas market. Prices have reached $25 per million BTUs in the UK, nearly five times the current price here in the US, which is itself now double the recent averages. Fertilizer plants got caught in the cross-hairs and can’t afford to keep operating with these input costs. So, they stopped operating.

This isn’t a crisis of fertilizer – there’s plenty of that to be had globally – it’s a crisis of carbon dioxide. To most people, carbon dioxide is known as CO2 and considered nothing more than the product of burning fossil fuels (i.e., a global warming gas). To the food industry, purified CO2 is a critical input across several important dimensions. Without CO2, both the meat and the frozen food supply chains would collapse. In the UK, they were weeks away from doing so – until the government finally stepped in overnight.

We won’t dwell on the horror of how CO2 is used to stun chickens and pigs before slaughter – I recognize how this is a uniquely personal issue. Instead, I’ll focus on the critical role CO2 plays in the cold chain, which is how temperature-sensitive goods are moved around in our economy.

Solid CO2 is colloquially known as dry ice. It has two outstanding properties which make it ideal for the cold chain: it freezes at a much lower temperature than water and it sublimes directly to a gas as it inevitably warms up. That means longer shipping times are possible and there’s no liquid mess to clean up when the package arrives (hence the use of the adjective “dry” before “ice”).

So…without fertilizer plants operating, there’s no purified CO2 byproduct. Without purified CO2 byproduct, there’s no dry ice. Without dry ice, there’s no frozen foods being shipped. Without frozen foods, society quickly dissolves into a hunger crisis. Politicians don’t like hunger crises, and for good reason. There’s usually a short path from “empty shelves” to “guillotine.”

Last night, the UK government did what it had to do. It bailed out their main fertilizer producer – CF Industries Holdings Inc. Pitched as a limited three-week deal for which details were not disclosed, the move likely averts a full-blown crisis for now.

Until we address the underlying insanity of the policies and perverse market forces that got us here, you can expect more seemingly random and ultimately expensive emergencies like these. The bill for this particular blunder came due and the UK decided to pay it. It won’t be the last.

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