Is OPEC's Oil Much Worse Than China's Rare Earth Metals?

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The U.S. just can't seem to find a way to control its own destiny in the energy game. For decades, Americans have complained about the stranglehold on oil prices that the Organization of the Petroleum Exporting Countries (OPEC) has. If the cartel wants prices to rise, they cut supply; if they want prices to fall, they increase supply. Alternative energy was seen as the road to energy independence for the U.S. But it won't be if China can help it.

If you follow the clean energy industry, then you know it's heavily dependent on rare earth metals. They're used to make the wind turbines, electric cars, and some other alternative energy products that green energy advocates love to imagine will one day be bountiful across the U.S. If you know about rare earth metals, then you also probably know that China is the leading source for these metals. Actually, that's an understatement: at least 95% of the global supply of rare earth metals is mined in China. The nation is virtually the only source.

China intends to use its possession of these incredibly valuable resources to its advantage. And since it's a controlled economy, it can affect the supply of these metals available globally, like OPEC does with oil. It has been doing so for a while now and today announced another export quota for 2011. The Associated press reports:

Numbers released Tuesday by China's Commerce Ministry show export quotas of the rare minerals will be down 11 percent next year as compared to the same period this year. China usually issues a second batch of quotas during the year, and it is not known how the figures will change later in 2011.

The new numbers say China is allocating 14,446 tons (13,105 metric tons) of rare earths among 31 companies. China allocated 16,304 tons (14,790 metric tons) among 22 companies in the first batch of quotas this year.

China has been reducing export quotas of rare earths over the past several years to cope with growing demand at home. A Commerce Ministry spokesman has also said that China is cutting its exploration, production and exports out of environmental concerns.

Environmental concerns could be legitimate, but the move certainly won't hurt Chinese firms. From the sound of this news, its domestic firms that use these metals to produce alternative energy products will still have a relatively abundant supply to utilize, providing them a clear competitive advantage. And the firms that mine these metals will enjoy monopolistic profits, since China can essentially set the global price based on how it controls supply.

If China really is doing this in the name of environmental concern, then that could be legitimate. But let's see some strong evidence supporting that claim. Has the nation also lowered its domestic firms' supply by 11%? Is it also aggressively trying to devise strategies to neutralize the environmental impact of this mining so that it won't have to cut supply in the future? Considering how much China has to gain by controlling the supply of rare earth metals, the burden of proof is on the growing Asian superpower to show that its goal here is environmental and not merely economic.

The consequences of this action by China could be perilous for the global economy. Energy costs have already been rising recently, as crude oil's price surpassed $91 per barrel today, up over 16% from a year earlier. As the prices for rare earth metals rise, they will make alternative sources of energy more expensive too. That will make the economic recoveries in the U.S. and struggling European nations even more difficult, as energy costs are an input for virtually every firm. Moreover, alternative energy is one of the few industries poised for rapid growth, but higher rare earth metal prices could slow the sector's expansion.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
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