3 Reasons We’re in a Crisis Worse Than the COVID Lockdowns Why the Iran War Will Break the Global Economy Britt Gillette Mar 31 “For the want of a nail the shoe was lost, For the want of a shoe the horse was lost, For the want of a horse the rider was lost, For the want of a rider the battle was lost, For the want of a battle the kingdom was lost, And all for the want of a horseshoe-nail.” ― Benjamin Franklin, Poor Richard’s Almanac For the Want of a Nail is a classic poem/nursery rhyme with roots traced back to at least the 13th Century. Benjamin Franklin helped to re-popularize it in his famous tome Poor Richard’s Almanac, but no one agrees on who the original author was. Nevertheless, the world is about to learn the wisdom of this classic proverb in the weeks and months ahead. As I write this, the global economy is unraveling. Imagine a sweater with a loose string dangling from its sleeve. Pull on the string, and you’ll soon realize the entire sweater is unraveling right before your eyes. What we’re witnessing right now is the same thing happening to the global economy. Global Depression Is Now Certain Unfortunately, a global depression is unavoidable at this point. As I’ve stated numerous times in the past few weeks, even if the war ends today and ships start moving through the Strait of Hormuz, it’s too late. Oil and gas production and processing facilities throughout the Middle East have already been shut-in. In many cases, it will take weeks (if not months) to bring these facilities online again and restore them to previous production levels. In the meantime, many of those facilities were shut down as a result of significant damage incurred from enemy drones or missiles. These facilities will take months (and in some cases years) to bring back online at pre-war production levels. We’re now on Day 31 of the Strait of Hormuz closure. Approximately 15% of the world’s daily oil production and 20% of the world’s liquified natural gas (LNG) production have been taken off the world market – meaning they’re simply unavailable to customers at any price. This is a fact I believe far too many people fail to understand. This war isn’t simply resulting in higher energy prices. It’s resulting in less energy. And energy is the lifeblood of all economic activity. Nothing moves without energy. Some parts of the global economy will no longer receive the energy to which they’ve become accustomed. And that means some parts of the global economy will no longer move. This sudden stop in economic activity doesn’t end with a failure to produce oil and gas. Instead, it begins with the failure to produce oil and gas. From there, subsequent oil and gas shortages wreak havoc on downstream supply chains, triggering a series of cascading failures throughout the global economy. Less oil and gas are first order effects of the war in the Middle East. Fewer oil and gas byproducts are second order effects of the war. Those will cause issues the average person hasn’t even considered yet. Cascading Failures in the Supply Chain The implications for gasoline, diesel, and LNG shortages are obvious. But the ripple effects of the current conflict run much deeper. We’re already witnessing an emerging crisis in three critical byproducts of oil and gas with significant ramifications for the global economy and entire societies: 1) Helium Helium is a byproduct of natural gas extraction and processing. It is trapped underground alongside natural gas and separated through cryogenic, or freezing, processes. When natural gas is extracted, it often contains trace amounts of helium, which are then separated and purified. Next to the United States (producing approximately 45% of global output), Qatar is the second largest producer of Helium in the world (responsible for approximately one-third of global output). On March 18th and 19th, Iran struck Qatar’s Ras Laffan Industrial City – the nation’s flagship liquefied natural gas (LNG) complex. It suffered extensive damage, with approximately 17% of production capacity knocked offline. Repairs will take three to five years. And this facility (which remains vulnerable to further Iranian attacks) produces one-third of the global helium supply, which even if it were being produced, can’t get exported through the Strait of Hormuz. You might think, “So what, Britt? Then I simply won’t buy floating balloons for my kid’s birthday party. Why should I care?” Because helium is used for far more than filling party balloons. Helium is a critical component for multiple industries, including healthcare, aerospace and defense, and semiconductor manufacturing. As an example, consider Taiwan Semiconductor Manufacturing Company (TSMC). TSMC produces advanced semiconductors for major tech firms like Apple, NVIDIA, and AMD. Manufacturing its chips based on client designs, it dominates the global market with more than 50% market share. Helium is a critical component in TSMC’s fabrication process. It’s necessary for wafer cooling, photolithography, purging and cleaning, and leak testing. Without helium, TSMC can NOT produce chips. And without those chips, the companies relying on those chips can not produce their own products. Compounding the problem, Taiwan relies on LNG to produce 40% to 45% of its electricity. And it imports over 99% of its natural gas with around one-third of those imports coming from the Middle East. With limited helium and electricity, how will TSMC continue to operate at pre-war capacity? The short answer – it won’t. And this will have ripple effects throughout the global economy. 2) Sulfuric Acid Sulfuric acid is another critical byproduct facing a shortage due to the war in the Middle East. Between 80% to 90% of the world’s sulfur — the primary feedstock for sulfuric acid — is recovered as a byproduct of oil refining and natural gas processing. As part of the process to make cleaner fuels, sulfur is removed from crude oil and can be converted into sulfuric acid. Again, some people might say, “So what, Britt? I haven’t used sulfuric acid since high school chemistry class. Why should I care?” Sulfuric acid is a critical component for multiple industries, including mining, chemical manufacturing, and battery manufacturing. Sulfuric acid is essential to the process of mining metals like copper, nickel, cobalt, and lithium. For example, it’s used in copper mining as a leaching agent to dissolve copper from oxide ores in heap leaching. The Guardian recently wrote about the impact of the Strait of Hormuz on the U.S. defense industry. As The Guardian reports: But sulphur is also burned to make sulphuric acid – the world’s most produced industrial chemical – which is used to extract copper and cobalt from low-grade ores. And these very metals, the Modern War Institute warns, are crucial for replenishing and repairing US military equipment being used or damaged in the current war in the Middle East, pointing out that “copper is a designated strategic material embedded in the transformers, motors, and communications hardware that enable bases to operate and defense factories to function”. The authors offer specific estimates for materials damaged in the early days of the war, writing that “it will take over thirty thousand kilograms of copper just to replace the two major US radars destroyed in Bahrain and Qatar” and “thousands of kilograms of additional copper to fix or replace other damaged US communication equipment, sensors, and radars in Jordan, Kuwait, Saudi Arabia, and the UAE”. They add: “The current sulfur shock is becoming a copper problem, and that copper problem risks quickly becoming a readiness and resilience problem.” And the impact is not just limited to the U.S. defense industry. Copper is an element vital to the global economy. It’s used in electrical wiring, plumbing, electronics, industrial machinery, solar panels, wind turbines, batteries, motors, braking systems, medical equipment, and so much more. But sulfuric acid is also a critical component in fertilizer production (especially phosphate fertilizers), accounting for over 50% of its global consumption. 3) Fertilizer Natural gas and petroleum are critical to the process of extracting hydrogen from methane, which is then combined with atmospheric nitrogen under high pressure and temperature to create ammonia (this is known as the Haber-Bosch process). This ammonia acts as the foundational building block for nitrogen fertilizers like urea and ammonium nitrate. Furthermore, reacting ammonia with phosphoric acid (derived from phosphate rock) produces ammonium phosphate fertilizers, such as Monoammonium phosphate (MAP) or Diammonium phosphate (DAP). Closure of the Strait of Hormuz, and damage to Qatar’s Ras Laffan, take 20% of the world’s LNG off market, significantly impacting global fertilizer production. As the Center for Strategic & International Studies reports: The Middle East is home to leading exporters of both liquified natural gas (LNG), a major feedstock for synthetic nitrogenous fertilizers, and fertilizers themselves, including urea and ammonia, the most common forms of nitrogenous fertilizers. A vast majority of these exports pass through the Strait of Hormuz. All told, the strait supports 20 percent of global LNG exports and 20–30 percent of global fertilizer exports, including 35 percent of global urea exports. Phosphate fertilizer trade carries its own exposure. Approximately 20 percent of global phosphate fertilizer trade originates from countries affected by the strait’s disruptions or the regional conflict more broadly, with Saudi Arabia and Israel together accounting for 17 percent of global phosphate fertilizer exports. Furthermore, sulfur, a byproduct of oil and gas processing, is also critical for phosphate fertilizer production. Approximately 45 percent of global sulfur trade is affected by the conflict’s disruptions. If energy shipments through the strait remain curtailed, and sulfur output falls alongside fuel exports, then the ability of many countries to produce phosphate fertilizers will be diminished. Less fertilizer = Lower crop yields Lower crop yields = Less food Less food = Higher food prices globally and possible famine in certain countries It goes without saying this is not good. Meanwhile, China has banned fertilizer exports  In mid-March, China banned fertilizer exports to protect domestic supply. China is responsible for approximately 10% of global fertilizer exports, making them the second largest exporter in the world next to Russia. And Russia also banned fertilizer exports Russia is responsible for approximately 19% of global fertilizer exports – making them the top exporter in the world. That means just short of 30% of the world’s fertilizer exports just disappeared from the world market as a result of China and Russia banning exports. Add that to the one-third of global exports which usually come from the Middle East, and we have a full-blown crisis with more than 60% of global fertilizer exports off the world market. This is catastrophic for the countries most dependent on fertilizer imports – but also everyone else. For example, Brazil imports over 90% of its nitrogen fertilizer. It’s also the world’s second largest agricultural exporter. This won’t end well. |
