The Looming Rare Earths Train Wreck
During her trip to China this week, Secretary of State Hillary Clinton will talk to Chinese officials about the world’s hottest commodities: rare earth elements.
Over the past few months, industry and government officials in the U.S. and Japan have been increasingly alarmed as China, which has a near-monopoly on rare earths, has reduced its exports of those elements by some 40 percent. Adding yet more anxiety to the situation are projections about a possible shortfall in the supply of these elements. London-based Roskill Consulting Group, a research firm that specializes in metals and minerals, recently predicted that demand for rare earths could outstrip supply as soon as 2014. Rare earths are important because they have special features at the quantum mechanics level that allow them to have unique magnetic interactions with other elements. A myriad of “green” technologies -- from electric and hybrid-electric cars to wind turbines and compact fluorescent light bulbs – depend on rare earths. And there are no cost-effective substitutes for them.
Clinton’s willingness to question China about rare earths is indicative of just how seriously the U.S. is taking the rare earths issue. But it also underscores a fundamental miscalculation by the U.S. and other countries when it comes the reconfiguration of their automotive fleets.
Over the last few years, a growing number of environmentalists and national security hawks have teamed up to denounce America’s dependence on foreign oil. Their solution: all-electric and hybrid-electric vehicles. Those vehicles, they insist, will help the environment while reducing oil imports from countries in the Persian Gulf and elsewhere.
While that vision appeals to certain segments of the political class and to a myriad of subsidy-seeking corporations, the push to build more electric and hybrid cars will simply result in the U.S. trading one type of import dependence for another.
Those vehicles might cut oil consumption but they will dramatically increase America’s thirst for rare earth elements. And therein lies a crucial choice: We can continue to rely on the liquidity, price transparency, and diversity of the global oil market, the biggest market in human history. Or we can choose the “green” route. And in doing so, we will have no choice but to rely on the market for lanthanides, which is rife with smuggling, has no price transparency, and depends almost wholly on a single producer, China.
The Chinese control about 95 percent of the global market in rare earths, a group of 17 elements that includes scandium, yttrium, and the 15 lanthanides, the elements that occupy the second-to-last row of the Periodic Table. The most famous of the lanthanides is probably neodymium, a critical ingredient in the high-strength magnets used in motor-generators in hybrid cars and wind turbines.
The possibility of a shortage of rare earths provides a critical lesson about the slow pace of energy transitions as well as the inherent limits of any major move to “green” technologies. Bill Reinert, the manager of Toyota’s advanced technology group, told me that China’s export cuts should force American policymakers to unplug their support for electric vehicles because the all-electric machines are “far more lanthanide-intensive than hybrid vehicles. We should be thinking about the material inputs for these types of cars in the same way that we do any other type of energy security.”
The diversity and size of the global oil market provides the U.S. with real energy security. The numbers tell the tale. In 2009, the U.S. imported an average of 11.7 million barrels per day of crude or refined oil products from 82 different countries while it exported – yes, exported -- an average of 2 million barrels per day to customers in 83 countries.
And here’s even better news for energy security: domestic oil production is increasing. In 2009, America produced an average of 5.3 million barrels per day, the highest level since 2004. Although that’s a big drop when compared to the production levels of the early 1970s, the perfection of techniques like multi-stage fracturing of long-length horizontal wells has led some industry analysts to conclude that domestic oil production is due for a substantial increase in the next few years.
While the U.S. will slowly begin increasing production of lanthanides over the next few years, primarily from a mine in California owned by Molycorp Inc., the relative shortage of lanthanides and relative abundance of oil has left Jack Lifton, a longtime metals analyst, shaking his head. Lifton asks the obvious question “Why convert our economy so that we are dependent on a set of commodities over which we have no control?”
That’s a painful question to answer particularly given that President Barack Obama wants 1 million electric and hybrid-electric vehicles on U.S. roads by 2015. By that time, the U.S. government will have provided about $31 billion in subsidies to companies that are developing and producing electric cars. In other words, American taxpayers are paying to increase U.S. reliance on Chinese exports of lanthanides at the very same time that China is reducing those exports.
If you’ll pardon the mixed metaphor, it’s apparent that governmental efforts to designate winners in the automotive sector is creating a very expensive train wreck. And while Clinton may try to slow down the train wreck, rest assured, that train wreck is coming.
Robert Bryce is a senior fellow at the Manhattan Institute. His latest book is Power Hungry: The Myths of “Green” Energy and the Real Fuels of the Future.