Freedom News Blog, March 23rd
Food, fuel and pharmaceuticals will all be affected by the blockade
By now you’re probably sick of hearing how much oil and gas comes through the blockaded Straights of Hormuz. Close to 34% of traded oil, 19% liquefied natural gas (LNG) exports, and 16% of the trade in refined petroleum products like diesel and jet fuel passes through the straights in a regular year. But last year was probably the last such regular year.
Brent crude, the global oil benchmark, is at the time of writing US$110 a barrel, up 60% since the US and Israel attacked Iran, while European gas prices have more than doubled. And while markets (i.e., traders gambling with your life to squeeze as much profit out of the chaos as they can) seemingly think the US and Israel may back off soon, if Iran continues to retaliate oil could go much higher – as high as US$200 per barrel, effectively breaking the global economy. My bet is Iran continues to squeeze while it can.
The impacts are far from even. Asia and Europe are highly exposed, and rationing has already been instituted in a number of countries, with the IEA suggesting everyone starts working from home as soon as possible in a bid to conserve fuel. Even major fossil fuel producer Australia is seeing panic buying. That we’re not in Britain is possibly a sign that we don’t quite understand just how dependent we all are on that oil.
Our dependency goes well beyond just oil and gas. It’s often not appreciated that oil and gas underpin the production of a huge number of critical resources. Three of the most critical are fertiliser, helium and pharmaceuticals.
Two crucial elements of most modern fertilisers are sulphur and urea. Sulphur is a by-product of the oil and gas refining process, and 44% of it comes from the Gulf. Urea is the globally dominant form of nitrogen fertiliser, and it requires natural gas as a feedstock. A feedstock is a raw material that is fed into an industrial or manufacturing process to be transformed into another product – most are fossil fuels (we’ll come back to this). One third of the world’s urea passes through the straights.
It’s worse than this though, as other countries also can’t produce fertiliser without gas from the region. India has cut output from three of its urea plants, while Bangladesh has shut four out five of its plants. China is restricting exports and the US only has 75% of the fertiliser is usually has at this point in the agricultural cycle.
We are heading into a critical planting period in the northern hemisphere – without fertiliser farmers will have to switch crops or just grow less food. For fertiliser dependent crops such as corn, wheat, and rice yields could decline by as much as 15%, driving millions more into acute malnutrition. And with fuel prices also higher, meaning working a farm gets more expensive, it’s likely in as soon as 6 months we’ll see another food price shock. Worse, climate change is also repeatedly hammering food security. In Britain alone one fifth of farmland is contaminated or unusable due to flooding.
Helium is also heavily affected as one third comes out of Qatar. Helium is used to run equipment like MRI machines and in semiconductor manufacture (no semiconductors, no ‘everything computer’). Around 8% of the world’s aluminium also comes out of the Gulf region. But more critical is the centrality of fossil fuels in the production of medicine.
Modern medicine uses fossil fuels as crucial feedstocks, as do the vast majority of chemical process (that should really be called petrochemical processes). From packaging to ibuprofen, without oil and gas much of what we think of as modern life disappears. But beyond the general impact of less-but-more-expensive oil, Big Pharma is utterly dependent on global supply chains. Half of the generic – i.e., cheap – drugs in the US come from India, and India’s pill factories are completely dependent on Gulf oil and gas.
More expensive fuel, food and energy are just the most visible signs. Everything will get more expensive. If the war continues for more than a few months, there will also be increasing shortages impacted the poorest first, as well as a steady collapse of exposed businesses.
One of the most exposed businesses is AI – so its perhaps not all bad.
AI and the data centres they manifest rely on having access to vast amount of capital that is also not afraid to bet big. To build the multi-billion dollar infrastructure you need huge sums of money. And a lot of that money has come from the Gulf autocrats. Without it, financing might not completely dry up but it would be much reduced, and all it will take to burst the AI bubble is a whiff of investor retreat.
Which is now happening. As Iran attacks it’s neighbouring complicit Gulf states, they are increasingly pulling their finance out of AI and data centres to focus on local resilience and rebuilding. One of the risks of the war is the damage to the AI and Big Data economy could go beyond missile strikes on data centres and into a full blown market route on AI stocks. And AI stock are all that’s keeping the US economy afloat at the moment.
The irony of a war that is increasingly being touted as one driven by AI being the reason the AI collapses would be delicious. The war may also accelerate the move away from global US dollar supremacy as Iran seeks to use its blockade to force oil sales in other currencies, another hidden aspect of the fossil fuel economy.
It’s far to soon to say how the war will unfold, and it seems unlikely that Iran will loosen its grip on Hormuz any time soon, even if Israel and the US retreat. It’s clear, though, that our chain of oil dependencies is only just starting to come into the light. The move to a just renewable energy system cannot come fast enough.