The Oil and the Glory
The Weekly Wrap — March 16, 2012
The trouble with cerium, and the murky world of rare earth elements: The opaque rare-earths wars are upon us again, now made part of U.S. presidential politics. They go back to 2010, when a Chinese tuna fisherman named Zhang Qixiong became an international celebrity by ramming a Japanese naval cutter, and improbably triggering an international ...
The trouble with cerium, and the murky world of rare earth elements: The opaque rare-earths wars are upon us again, now made part of U.S. presidential politics. They go back to 2010, when a Chinese tuna fisherman named Zhang Qixiong became an international celebrity by ramming a Japanese naval cutter, and improbably triggering an international crisis over the availability of so-called rare-earth metals. These are the 17 elements that we care about because they make possible our wind turbines and electric cars, not to mention our iPhones and flat-screen TVs. China, which mines some 97 percent of the global supply, cut off rare-earth shipments to Japan in response to the trawler incident, and for awhile seemed to do so for much of the rest of the world, too. Since then, mines have been under development in other countries, such as Molycorp. in California and Lynas in western Australia (pictured above, Lynas builds a rare earths processing plant in Malaysia).
But these alternative sources are not quite up to speed as yet. So on Tuesday, President Barack Obama announced that the U.S. joined Japan and the European Union in a formal complaint against China’s rare-earths policy with the World Trade Organization. The accusations include that Beijing allowed its rare-earth traders to export just 55 percent of their quota last year, specifically 18,500 tons of the 33,000 tons permitted. Export prices averaged $104 a kilo last year, double those available within China, reports Kevin Allison at Reuters. To which Chinese officials and writers retort that in fact demand has been weak, and that Western end-users simply didn’t buy the full quota.
What is really going on? I asked Jack Lifton, a Detroit-based rare-earths expert, whether he could make some sense of the conflicting accounts. Lifton wrote back:
I think the ‘not willing to sell’ meme is a misinterpretation of the mechanics of the rare earth market. Chinese traders who have allocations for export were up until last year getting total tonnage allocations (i.e., they would get an allocation of 100 tons, for example). It didn’t matter last year whether or not the exporter sold 100 tons of dysprosium for $200 million or of lanthanum for $10 million. So you can guess which one they tried to do. Since critical rare earth metals such as dysprosium are in much shorter supply than the ones of little or no use such as cerium (50 percent of all rare earths mined), the inventories rapidly became skewed. Many Chinese exporters did as they have always done: They told buyers that if they wanted one ton of dysprosium, they had to take 99 tons of cerium, too, or get nothing. This game has been going on for years in the neodymium-for-magnets trade. In any case, the pressure on the Chinese traders to get rid of expensive inventory wiped them out of the neodymium and dysprosium, terbium, and europium that they could get. So they are whining that the round-eyed and slanted-eyed imperialist warmongers and their running dogs don’t want the cerium, and we don’t want the jerks in Beijing to figure out their mistake, so we will say we weren’t allowed to sell.
The Beijing boys figured it out last year, and allocations are now by individual rare earth.
Go to the Jump for more on rare earths, and the rest of the Wrap.
But what about the outside supply. When will it reach Western companies? Lifton:
There has been a steady supply of ‘alternately sourced’ rare earth elements all along. Molycorp re-entered the market in 2008, and in 2009 produced nearly 4,000 metric tons of light rare earths from existing stocks of concentrates. I have been told that Molycorp has begun mining new ore, although I do not think its new processing plant is complete or yet integrated. I actually believe that Molycorp, if it has no domestic competition, will saturate and satisfy the entire domestic American market for light rare earths at less than half of its stated planned production level.
In an election-year battle in which he is being accused of softness on China, Obama is likely to keep talking tough. And Republicans are likely to keep talking about China. So do not look for the rare-earth wars to end soon.
Does energy independence mean leaner overseas commitments? The story goes that, if the U.S. can get off of foreign oil, a primary benefit will be the ability to distance itself from nefarious petro-state rulers, and scale down its naval patrols of Persian Gulf sea lanes. But what is likely now that the U.S. will be getting much higher volumes of oil from U.S. shale, Canada’s oil sands and the deepwater Gulf of Mexico? While writing a story at EnergyWire, I found that the likelihood is that the U.S. diplomatic and military commitment abroad will be largely unchanged. While U.S. demand for oil imports will decline, it will not for fast-growing countries that the U.S. cares about, such as India and Turkey. Japan will still need much imported oil and liquefied natural gas. This cuts both ways — the U.S. will remain intimately engaged with the rulers of the world’s leading petrostates; and the U.S. Navy will remain a dominant force on the seas.
Among those I spoke with was Col. Larry Wilkerson, who was chief of staff to Gen. Colin Powell when he was both chairman of the Joint Chiefs of Staff and secretary of state. Wilkerson said that, regardless of oil supertankers, the Navy in fact is only going to be more important abroad as the U.S. probably pulls back ground forces from Europe, Japan and South Korea. The strategy is thus, Wilkerson said:
You maintain formidable forces in carrier battle groups and Marine amphibious groups, and certainly air forces too, especially B2s, which can circle the globe. You maintain those forces ready to strike wherever you need to, and you don’t maintain ground presence in areas, particularly where it’s volatile to do so.
The U.S. is headed toward a time of lesser absolute commitment abroad, but that is not because of oil, but simply that it doesn’t have the money to patrol the entire world any longer, said Eric Thompson, acting director at CNA Strategic Studies. The U.S. will still want to be the key player in the maintenance of stability and security of commerce, but it will want to share the responsibility with regional actors, Thompson told me. He said:
You can find creative new ways to promote that global security through greater transparency and international norms, through greater participation in coalition operations. To promote the development of regional standard bearers — Indians leading in the Indian Ocean, Europeans leading in North Africa.
David Victor, a professor at the University of California at San Diego, told me that price is an overlooked factor in the discussion. When you add that in, you see that the U.S. faces the same international mix of problems. Victor said:
I don’t think the issue is U.S. self-sufficiency. So long as we are connected to the global oil market, what really matters is the global price for oil and the rents that accrue to oil exporters. If the U.S. were an even bigger producer, then more of those rents would flow to the U.S. But the foreign policy effects of that are small. The foreign policy effects of huge rents flowing to Venezuela, Iran, Russia, or other countries whose internal politics get torqued by oil revenues are the real worry.
The politics of oil stockpiles: On Tuesday, this blog wrote that President Barack Obama would in the coming months release a large volume of oil from the Strategic Petroleum Reserve. Yesterday, Reuters’ Richard Mably had a scoop that Obama and U.S. Prime Minister David Cameron had decided together to proceed with such a release of their respective reserves, with the details to be worked out. Both the White House and the British denied that talks are so advanced. Yet the oil market’s reaction showed why the world’s strategic reserves can be powerful instruments — when word of Mably’s piece spread, oil prices plunged; when the denials rolled out, they went back up.
Strategic reserves can have lasting impact when they are released methodically and shrewdly, as suggested by Michael Levi on his blog at the Council on Foreign Relations. When they are not, the market quickly catches on, and you are back to square one. In this case, Obama’s and Cameron’s calculus converges on the point of Iran — they would like to undercut the fear that Iran can hurt global oil markets by withholding its supply. Obama of course also faces election-year problems of high gasoline prices, which regardless of the White House’s denials will figure into his thinking on a release of oil. One cannot bypass politics. Oil is figuring large in this year’s.