The Garrulous Jay – The CO2 Paradox

So we now have a blockade of a blockade, which is almost as surreal as a ‘CDO-squared’, the dangerous financial weapon of mass destruction that brought the global financial system to the brink of collapse 18 years ago…

And from this surreal geopolitical standoff emerges the CO2 paradox.

As a result of the partial shutdown of global oil production, the industry that is largely responsible for the CO2 emissions that some would foretell will lead to planetary incineration – the same gas that we are endeavouring to capture and bury on an industrial scale – we now find this very commodity is in short supply.

But why is CO2 so critically important? What do we do with it? And why is its supply under threat?

CO2 is a key component of a range of industrial, agricultural and medical processes including food and beverages (drinks and packaging), greenhouse-based cultivation, meat processing, healthcare, water treatment, chemical production, concrete production, transportation cooling agents, polymer production, diagnostic imaging and even the cooling of some nuclear reactors.

The irony of this is that CO2 is actually a waste product, not just from the burning of hydrocarbons for power, but from other industrial processes too. Most prominent of these is the production of fertilisers, and more specifically urea.

Perhaps, like me, you thought that the closure of the Strait of Hormuz had directly blocked the flow of urea onto world markets. No totally so…

Natural gas is a critical synthesiser in the Bosch-Meiser process whereby ammonia and CO2 react to form the chemical from which urea is derived. And that, my friends, is your fertiliser.

The problem is that the dependence of the process on the availability of reasonably priced natural gas means that when the gas price spikes the fertiliser industry says “yikes” and factory shutdown strikes.

And no fertiliser production means no by-product emissions, meaning no CO2, leading to problems for all those areas listed above.

So what conclusions might one draw from this?

The first, is that geography matters. The citizens of a powerful country bordered by two seas and just two other countries might not all fully appreciate the geopolitical subtleties of having to rub along with one’s neighbours. Nor might they understand how a narrow stretch of water might be a perilous potential choke point if it happens to be a global lifeline in the supply of oil and natural gas.

Secondly, it serves as a reminder that in an interconnected world understanding supply chains is of fundamental importance to understanding global asset prices…

The supermarket pork buyer must attempt to forecast the fortunes of the pig farmer, who must in turn consider the prospects for the slaughterhouse owner, who needs to assess the outlook for fertiliser manufacturers, who must look to the shippers of natural gas who must consider the security of transit and state of supply of the oil producers who must decide who might be their political friends and foes.

No country, nor any business, is truly an island.