Today's UK Guardian has an article about how Russia, Iran, and Qatar are forming a natural gas cartel rivaling what OPEC has done for oil.

The move by the three countries, which control 60% of the world's gas reserves, was met with immediate opposition from the European commission, which fears the group could drive up prices.

Alexey Miller, chairman of Russia's Gazprom, said they were forming a "big gas troika" and warned that the era of cheap hydrocarbons had come to an end.

"We are united by the world's largest gas reserves, common strategic interests and, which is of great importance, high cooperation potential in tripartite projects," he explained. "We have agreed to hold regular - three to four times a year - meetings of the gas G3 to discuss the crucial issues of mutual interest."

The direct impact on the US should be minimal as at the moment, US LNG (liquefied natural gas) imports are minimal, however as LNG infrastructure develops and the market approaches the level of fungiblity that exists in petroleum markets, that may have a significant impact on the prices in this country.

Of more immediate concern is the impact that this may have on the variety of industries for which natural gas is a key feedstock.

Prices have saw a large run up this spring. Prices rose by almost a fifth between April and June.

Compare this to Russia, where domestic gas prices are, by law, fixed at a rate substantially lower than that in the West.

The prices for 2008 were set by the December 4, 2007 Order # 403-e/1 of the RF Federal Service for Tariffs. The average regulated wholesale gas prices in 2008 will amount to RUR 1,690 per 1,000 cu m (net of VAT) for industrial consumers and RUR 1,290 per 1,000 cu m (net of VAT) for the population. Practice shows that the industrial sector of the Russian economy has already shaped an environment to sell gas at free prices. To that end, in recent years Gazprom has been bringing forward the initiative of applying stock market technologies to set prices for gas supply to industrial consumers, with regulated gas prices to be retained exclusively for utilities, budget sponsored customers and the population. In order to gain the practical experience in stock exchange trading in Russia, the “5+5” experiment was carried out, namely 5 bcm of OAO Gazprom’s and 5 bcm of independent producers’ gas was sold in 2006-2007 at free market (contractual) prices via an electronic trading platform. According to the decision of the Russian Federation Government, the experiment will be continued. In 2008 Gazprom, its subsidiaries and independent companies will be able to sell up to 15 bcm of gas on a parity basis via an electronic trading platform.

We have to do multiple conversions here in order to get a proper comparison. First we have to convert the ruble price to dollars. So for industrial users the price of gas is RUR 1,690 per 1,000 cu m. This is $63.30 for 1000 cu m. There are 35,315 cubic feet in 1,000 cubic meters. Which means that 1000 cubic meters is the same as 35.3 1000 cubic feet. So we have to divide $63.30 by 35.3 to get a comparable price.

The price for 1000 cubic feet of natural gas for the Russian industrial users is $1.79. Again, the comparable price in the US is $7.27. So Russian gas prices are under a quarter of comparable prices in the US. And while there's no LNG connection between Russia and the US, this does not mean that there is no danger to the American economy.

The majority of ammonia production occurs via the Haber-Bosch process using natural gas as feedstock in the production of ammonia destined for use as fertilizer. Modern American agriculture is heavily dependent on chemical inputs in order to sustain production, and as farmers cut back on fertilizer inputs protein levels in wheat drop. Neal from Stranded Wind explains it really well.

I knew corn required ammonia to make the astonishing yields we've seen in the last few decades; fields that would have produced fifty bushels an acre two generations ago currently produce four or five times that amount. I wasn't aware of the tremendous difference that ammonia made in crop protein as well as overall yield, but Bryan Lutter, a farmer and seed distributor in South Dakota, recently brought me up to speed on it.

"Farmers can't afford a thousand dollars a ton, so they've cut back on fertilizer. Wheat protein percentages will drop from 14% to 8%. People are going to starve.".....

Assuming we dodge the wheat rust and climate issues the 43% reduction in protein content we won't have much trouble here in North America but it is going to be awful for places like Haiti.

And it should be kept in mind that melamine, the chemical that poisoned thousands of American dogs and dozen of Chinese babies, is added in order to "spoof" protein levels. Basically, if you add melamine to food it makes it look like there's a lot more protein in the food then there really is. If protein levels in wheat and the products processed from it because fertilizer inputs have been cut, then there's a tremendous incentive to add melamine to make it look like this isn't happening. Of course it may just kill you, but c'est la vie.

Another very real possibility is that the drive to lower production costs for fertilizer many lead large firms to move to Russia to take advantage of cheap natural gas prices. The principal impediment is transportation cost. Russia does however have a limited capacity to export through its Tamanfacility in southern Russia on the Black Sea.

Regardless, the USDA has not been ignorant to growing ammonia imports, and the impact that this has on farmers livelihoods.

So we basically face serious challenges in terms of fertilizer prices going through the roof, and production potentially being offshored. But there is another way.

Over at the Stranded Wind Initiative there's a great diary up about the production processes that are being looked at to manufacture ammonia using electricity from wind power. If these can get off the ground, they have the power to transform rural America, and free our food production from dependence on foreign gas.

Drs. John Holbrook and Jason Ganley of NHThree, LLC have created a method which is called solid state ammonia synthesis. The reaction chamber is an array of electric powered ceramic tubes into which water and nitrogen are fed and ammonia is produced. The technology is basically a fuel cell made to run in reverse, turning water, nitrogen and electric energy into ammonia. Capital costs and power usage will be dramatically lower with this method compared to Haber-Bosch. The biggest benefit will be that this is a modular technology with no lower bound to its size, unlike the Haber-Bosch systems which have a minimum reactor and support equipment size that runs into the millions. Solid state ammonia synthesis can start with a single tube and a wall power socket.

Dr. Ed Cussler and Ph.D. candidate Mark Huberty are working on a modification to the original Haber-Bosch method that would allow batch production using a simple salt to absorb the ammonia. Traditional Haber-Bosch based plants and very large and must be run continuously but wind power is only available intermittently. If this approach is proven to production scale a single wind turbine could be found driving a electrolyzer, nitrogen separation unit, and a small reactor with the production being sufficient to support corn crops on several square miles of land.....

The trend to smaller operations might surprise some people but there are several drivers for this. U.S. ammonia plants have declined in recent years as local gas prices and labor costs climbed until we reached the point where 75% of production is offshore. Prices then spiked to triple their 2006 level. Farmers are the primary user of ammonia and for some crops they've simply stopped fertilizing and accepted the yield losses. The smaller ammonia plants of all types are amenable to use with renewable resources such as hydroelectric, wind, or solar, and this plays well with the carbon taxes anticipated to start with the new U.S. administration.

In the long term, we either have to work towards freeing our farms from natural gas, or we have to deal with Russia and Iran having something far more dangerous than an energy weapon to play us with: the food weapon. If we are dependent on foreign powers for fertilizer, we are dependent on foreign powers for food. We need to nip this in the bud, now.