Ammonia, the basis for most modern fertilizers (and for that matter explosives) is in some respects the most important man-made substance in the world. Without it about half the human race would starve. Billingham was the last remaining fertilizer producer in the UK: so this thing matters. The good news is that you can ship ammonia relatively easily. So CF – an American company – will stop producing ammonia here and instead bring it from the US. Why, you may be wondering, am I bringing this up on a day when the government has agreed to waste many billions of pounds on business support? Because the plight of CF is right at the heart of it. Read more: Energy bills: How government bailout will affect homes and businesses Liz Truss ‘will be bigger than expected in energy crisis’ as PMPound falls to 37-year low as public debt servicing costs reach in a record August Ammonia is made with natural gas. The reason CF stopped production in the UK is because with European gas prices so high and US gas prices so low, the amounts just stopped adding up. Chemical companies have a phrase for these kinds of decisions… “make or buy”. At a certain cost level, the economics of building something in a given location cease to make sense. you should buy this product from abroad. Use Chrome browser for more accessible video player 2:34 What is the cost of the UK’s energy strategy? In CF’s case, the pendulum swung from “make” to “buy” earlier this summer. And it was this dangerous limit that the Department for Business Energy and Industrial Strategy had in mind when it set the energy price cap for businesses. When wholesale gas prices rise above a level of around 220p per heat, businesses will be protected from the rise. The taxpayer will pay the difference between this level and the wholesale price. something similar applies to electricity. The consequence of this is quite huge. It represents one of the biggest economic interventions in modern times (though to be fair, with the similar regime for households the other week and the furlough regime a few years ago, these almost unprecedented moments seem to be coming more and more often). . The result is that some businesses that would otherwise have to close, forcing us to buy products from overseas, may be able to keep things going a little longer. For smaller, less energy-intensive businesses – pubs, hairdressers and retailers – the scheme will help. It’s the difference between mind-blowingly high bills and doomsday bills. None of this will prevent the economy from facing a severe recession in the coming months. But it can help – and it brings the UK closer to other European and Nordic countries, almost all of which are helping their energy-intensive companies either continue or hibernate until energy costs fall. But at what cost? The short answer is we don’t know. Nobody has a clue. As things stand, the business pack is only going to last for six months – unlike the home energy warranty which runs for two years. According to Cornwall Insight, at current energy levels the business scheme could cost £25bn. And if you assume it was extended over two years, then that’s £100bn. Add in the household energy guarantee, which at the prevailing energy price a few weeks ago was going to cost £70bn a year and the total could add up to almost a quarter of a trillion pounds. This is an amazing amount. Use Chrome browser for more accessible video player 0:26 pm committed to business But here’s the thing: we just don’t know how much it will cost, because that depends almost entirely on what happens to the wholesale price of natural gas. As it happens, that price has fallen quite a bit in recent weeks amid hopeful news about how much natural gas continental European countries have stockpiled and hopes that the war may be relatively short-lived. If it continues to decline, then these plans could end up being significantly cheaper. if it goes up then they can be incredibly expensive. We just don’t know. This is one of those situations that goes far beyond fiscal arithmetic. All of which explains why investors are so nervous about UK public finances at the moment. This recent hyperbole does not fully explain the pound’s weakness. The dollar is very strong right now, for one thing. However, it is definitely a part of history. You can understand this because, firstly, the pound is also weak against other currencies and, secondly, because other metrics show an increased level of concern. Consider, for example, credit default swaps that are a form of insurance against an issuer that defaults. CDS spreads on UK debt widen – from lowest in G7 to highest. Market participants deciding whether or not to invest in this country seem to be a little worried. And one can understand their point of view. The Truss government began its lease by signing two rather large blank cheques. We jump into a pool, but no one knows how treacherous the waters could become.
