Where Did All the Flour Go?
The war in Ukraine is likely to reduce the amount of wheat in the world. But, if there are severe food shortages later this year, blame our energy policy and not Putin.
In the 17th chapter of the book of 1 Kings in the Old Testament, God sends His prophet Elijah to stay with a poor widow amidst a severe drought and famine. The widow had no food except “a handful of flour in a jar and a little bit of olive oil in a jar.” God cared for His prophet and the widow, promising the “jar of flour will never be empty and the jug will always have oil in it.” In our modern society, flour never runs out. We assume it is always available at the local grocery store because, in the past, it always has been. Sometime in the next year that might not be true. Flour might not be available. But all is not lost. You will be able to rent a Tesla electric vehicle (EV) at your local Hertz rental center.
No flour on the shelves but EVs readily available to rent? Yes. That is the trade-off we are making as a society without realizing it. Behind our grocery store is a very complex supply chain that is becoming more fragile by the year. Politicians and media pundits will tell us that everything energy related is Putin’s fault. Prior to that we blamed it all on COVID-19. At best, these are the straws that broke the camel’s back, but not the reason the system is under stress in the first place. For that, you must look at our energy policy.
As a society, we have declared war on fossil fuels and, by extension, on our food supply. Problems, once set in motion, take time to work themselves through our supply chains. This war is driving up the price of oil and natural gas. Green Energy fanatics are privately and smugly reveling that high energy prices will make EVs and renewable energy attractive. “It is a small price to pay for saving the planet,” is the corresponding thinking. What they don’t realize is that the price and availability of oil and gas affects everything we do, particularly feeding our population. When all is said and done, our society’s fascination with EVs may have the same effect on the food supply as setting fire to millions of acres of farmland just before harvest.
Blame ESG not Putin for high prices at the pumps
There is a convenient narrative being pushed these last six weeks that Russia’s invasion of Ukraine is the reason we are all paying more for gasoline. The global price of oil (which drives gasoline prices) has been marching steadily upwards for nearly two years. The reason is primarily due to supply and demand. For most of 2019 supply and demand were largely in balance and the price of oil hovered around $58 per barrel. Demand dropped dramatically as the world entered the pandemic and supply quickly followed, causing price to plummet (for a moment in 2020 the price of oil went negative). As shown in the left side of the chart below, demand recovered in the middle of 2020 and has steadily outpaced supply. As a result (right side of chart), the price of oil has marched steadily higher ever since.
You can see two small spikes in global oil prices following Russia’s invasion of Ukraine on February 24, 2022. However, prices have generally dropped back to the trendline. I expect them to continue to slowly increase until production catches up to demand, which due to ESG may not happen any time soon.
ESG stands for Environmental, Social, and Governance. ESG emerged as a popular trend in the 1990s driving companies to be more responsible and stop focusing exclusively on the bottom line (profit). Today, it is very much fueled (pun intended) by the Green Energy movement that seeks to combat Climate Change. ESG carries such incredible sway in the board rooms of most corporations that any new investment proposal related to fossil fuels or mining is likely to be rejected. Here are just four of many examples of ESG’s impact:
· On their first day, the Biden Administration shut down the $8 billion Keystone XL pipeline
· In July 2021, an activist investor fund took three board seats on the Exxon board of directors with the intention to cut oil exploration and production in half
· A Dutch court ordered Shell oil company to reduce emissions by 45%
· Europe’s largest investment fund pressures Credit Suisse (a top European bank) to stop financing fossil fuels projects
As one energy expert put it, “The modern world we enjoy today is a direct result of efficient and abundant source of energy.” That modern world has been under attack for years in the name of Climate Change and ESG. Yet, a whole new front in this war on energy opened in 2020. Despite all the fanciful talk of demand for oil peaking (because EVs and renewable energy will take over), the need for oil and natural gas will continue to increase. It is supply, not demand, that is likely to peak. With banks unwilling to finance and governments known to withdraw permits on existing efforts, new energy projects of any consequence have essentially stopped.
Renewables won’t replace Oil and Natural Gas …
Progressives are not shy about their enthusiasm for high gas prices. The logic here is that gasoline prices had been too cheap, keeping the economy from switching to renewables such as wind and solar power. In this thinking, higher gas prices are desirable because they drive people away from conventional cars to a Tesla, Prius, or another electric vehicle. Late night comedian Stephen Colbert railed against the criticism of Biden’s energy policies by saying, “I’m willing to pay $4 a gallon. Hell, I’ll pay $15 a gallon because I drive a Tesla.” Of course, the price of energy and that of a new Tesla are of no concern to those being paid $15 million dollars per year by CBS. Colbert’s tone-deaf remarks are the 2022 equivalent of “let them eat cake,” a reference to Marie Antoinette’s disdain for the common people in 18th century France. History suggestions that she may never have uttered the phrase. Regardless, the attribution is fitting because at the height of her reign as Queen of France, bread was so expensive, it represented half the daily wage of a commoner. The mindset of the French ruling class was, if they can’t afford bread, let them eat cake (which would have been many times more expensive). Today, that would be like someone saying, if you can’t afford $4/gallon gasoline, just go buy a $80,000 Tesla.
I am not unsympathetic to carbon emissions contributing to global temperatures, but you must have a plan before you start mucking with things that are so interconnected. There are three primarily reasons attacking gasoline is having unintended consequences. First, virtually everything is made from petroleum products. Your plastic water bottle, insulation for wiring in cars and homes, the shingles on your roof, and medical supplies. Virtually everything we use starts out as a biproduct of turning oil into gasoline. Drive up gas prices and everything gets more expensive. Have you seen the inflation numbers lately?
Second, natural gas was supposed to be part of the solution to global warming, but we are now treating it like the problem. Natural gas emits the least amount of CO2 of any traditional fuel source, at about ½ that of coal and about 70% of gasoline or home heating oil. One of the most successful ways to reduce our global carbon footprint was to transition as many power plants as possible from burning coal to burning natural gas. We were making progress because we were blessed with natural gas in abundance. The United States recently overtook Russia and Saudi Arabia as the world’s largest energy producing country, because of shale oil/gas fields in places like Texas and Pennsylvania. The process of fracking allows oil and gas previous trapped underground to be extracted quite cheaply. Fracking has very real environmental concerns but rather than address them, ESG has made it Enemy #1. Consequently, natural gas in the US is making a 13-year high at $6.25/MMBtu as ESG restricts drilling for fossil fuels. Thankfully, it is nothing compared to that of Europe, a place where cheap energy is in short supply and ESG-craziness is abundant. Natural gas is seven times more expensive in Europe. Without fracking, that is where we would be.
The third and final reason hostility towards fossil fuels has severe consequences is that oil and natural gas use is not going away. Never in history has a newer energy source eliminated the prior one. Biomass energy (the burning of wood) fueled the world from the time of the Roman Empire until the industrial revolution. Shortly after revolutionists in France said, “off with her head” to Marie Antoinette, coal became the world’s major source of energy beginning in England. Burning of wood never went away, though. It remains the primary source of energy in third-world countries. When oil was discovered in Titusville, Pennsylvania by Edwin Drake in 1859, coal was the dominant source. A 160 years and billions of oil barrels later, coal remains. Even if wind and solar succeed to the highest expectations, they will primarily cover the world’s need for more energy.
Increasing the standard of living of people is primarily accomplished by using more energy. As developing nations work themselves out of poverty, their citizens eat more meat, they build nicer homes, and they become more mobile. The per person energy usage increases by a factor of five going from a third-world to a first-world lifestyle. It doesn’t matter how many Americans drive EVs, development in Africa and Asia will absorb every amount of energy the global economy can provide. It is naïve to think that wind and solar will provide so much electricity that fossil fuels can be done away with. It is foolhardy to plan on this and it is downright dangerous to jeopardize the supply of them before renewables have proven broadly successful. ESG has done exactly that.
But wheat and other agriculture products will be collateral damage as they try
One thing that the Russian invasion of Ukraine is going to do is severely limit the global sales of wheat and other grains. Together the two countries represent a quarter of the world’s exports of wheat. Ukraine is known as “Europe’s Breadbasket” for a reason. It is unclear yet, how much Ukrainian farmers will be planting this season given the devastation and migration. If that weren’t bad enough, Russia supplies much of the world’s fertilizer. Belarus, Russia’s partner in crime, is another big fertilizer supplier.
Fertilizer is the key and the largest problem of it all because it effects farming everywhere. The price of fertilizer has doubled in the last year, and that is even before the war began.
Are you noticing a pattern? It is similar to natural gas prices marching higher from the middle of 2020. The most critical fertilizer to this discussion is nitrogen. Nitrogen must be applied to the soil at least once, sometimes twice per year or a farmer risks a substantial drop in yields. The primary input to making nitrogen fertilizer is natural gas. As goes the price of natural gas, so goes the price of nitrogen and other fertilizers.
The price run-up began in 2020 but this spring will be the first full planting season in the northern hemisphere with fertilizer prices roughly twice what they have been over the last decade. Farmers globally are almost certain to use less nitrogen and will have a correspondingly smaller harvest. Wheat inventories in the US are already problematic as production has been on the decline in recent years and the US has stepped up exports to other countries. According to U.S. Wheat Associates, “wheat stored as of March 1, 2022, was 1.02 billion bushels (27.7 MMT), down 22% from a year ago and the lowest in 14 years.” Low inventories now, major supplying countries not able to plant, and farmers everywhere using less fertilizer all signal a flour shortage. Of course, the consolation is that Hertz will have Tesla Model Y vehicles for rent later this year.
What do we do about this? Growing your own wheat won’t work. Even the most spacious backyard garden can only grow enough wheat for a few loaves of bread. For now, flour is relatively cheap and available in the stores. There is a decent chance that won’t be the case late this year. I am buying that a year’s worth of flour for our pantry. (One hint: if you are going to do something similar: use airtight containers and put the flour in the freezer for a week or more to kill any pests.)
In Conclusion
‘Dumb policy’ is nothing new, but we are entering unchartered territory. Our three-acre property is surrounded by farmland, which most of the time is growing feed corn for ethanol. I asked my farmer neighbor about it one time. We got to talking about the wisdom of the US government’s energy policy of mandating corn-based ethanol being blended into gasoline. He said, “That has got to be the dumbest policy ever. All it does is take food and burn it up in your gas tank. But hey, if they have such a dumb policy, I’ll supply them the corn.” My neighbor is correct. Ethanol ranks as the least efficient energy source in the world. It takes almost as much energy to grow corn and process it into ethanol as you get out of it in the end.
Progressives have made it fashionable to constrain natural gas production because they have an axe to grind against all fossil fuels. In doing so, they were setting up a colossal shortage of key grains like wheat. Combine this with a likely bad crop in war-torn Ukraine and export restrictions of wheat and fertilizer coming out of Russia, we are looking at a famine in developing countries and possible food shortages in developed countries like the US. Food shortages have a way of creating substantial unrest in the population. Where that to happen, I’d refrain from saying, “Let them rent a Tesla.” Corn poured into your gas tank is, at worst wasteful, but it won’t get anyone’s head taken off. I can’t say the same for uttering that phrase about renting a Tesla.
< Please share this article with others. >