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Cornering the market - Oct 24

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Many more articles are available through the Energy Bulletin homepage.



Rare and Foolish

Paul Krugman, New York TImes
Last month a Chinese trawler operating in Japanese-controlled waters collided with two vessels of Japan’s Coast Guard. Japan detained the trawler’s captain; China responded by cutting off Japan’s access to crucial raw material

And there was nowhere else to turn: China accounts for 97 percent of the world’s supply of rare earths, minerals that play an essential role in many high-technology products, including military equipment. Sure enough, Japan soon let the captain go.

I don’t know about you, but I find this story deeply disturbing, both for what it says about China and what it says about us. On one side, the affair highlights the fecklessness of U.S. policy makers, who did nothing while an unreliable regime acquired a stranglehold on key materials. On the other side, the incident shows a Chinese government that is dangerously trigger-happy, willing to wage economic warfare on the slightest provocation.

Some background: The rare earths are elements whose unique properties play a crucial role in applications ranging from hybrid motors to fiber optics. Until the mid-1980s the United States dominated production, but then China moved in.

“There is oil in the Middle East; there is rare earth in China,” declared Deng Xiaoping, the architect of China’s economic transformation, in 1992. Indeed, China has about a third of the world’s rare earth deposits. This relative abundance, combined with low extraction and processing costs — reflecting both low wages and weak environmental standards — allowed China’s producers to undercut the U.S. industry.

You really have to wonder why nobody raised an alarm while this was happening, if only on national security grounds. But policy makers simply stood by as the U.S. rare earth industry shut down.
(17 October 2010)
There is a new game being played across the globe -- corner the resources -- and the United States has not caught on, blinded as it is by the delusions of free markets and globalization.

Related:
China's Dumb Embargo by Kevin Drum (Mother Jones)
Three ways of looking at Chinese economic statecraft (Foreign Policy)
-BA



Rare-Earth Furor Overlooks China's 2006 Industrial Policy Signal

Xiao Yu, Michael Forsythe, Feiwen Rong; Bloomberg News
China’s curbs on rare-earth exports may owe more to a 2006 policy to create fewer, larger companies than a knee-jerk response to trade and territorial disputes.

A directive that year tagged mining among the pillar industries the government wanted state enterprises to dominate to enhance returns and global competitiveness. This year it started closing down private mining companies to consolidate the industry around a handful of producers led by Inner Mongolia Baotou Steel Rare Earth High-Tech Co.

Global repercussions from the overhaul drew attention in July when the government said it would cut export quotas 72 percent in the second half of the year. China accounts for more than 90 percent of worldwide production of the metals, used in components for Toyota Motor Corp. hybrid cars, Lockheed Martin Corp. radars and General Dynamics Corp. tanks.

“It’s not a new policy,” said Peng Bo, an analyst at Shenzhen, China-based Guosen Securities Co. “China, as a supplier of 97 percent of rare-earth demand, feels a need to control both production and exports and doesn’t want to sell at dirt-cheap prices.”
(21 October 2010)



OPEC: A lifeboat in a turbulent sea

Walid Khadduri, Al Arabiya
Last week, the Ministerial Council of OPEC decided to maintain the policy on oil production that was agreed upon in the Algerian city of Oran in the autumn of 2008, with the beginning of the global financial crisis. This policy specified a production cut of nearly 4 million barrels per day, lowering the production ceiling of OPEC member states (with the exception of Iraq) to 24.8 million barrels per day. OPEC's ministers expressed their satisfaction with the price level, which ranges between 75 and 85 dollars for the barrel, as this benefits both producers and consumers.

The price level is high enough for the budgets of most oil producing countries. The stability of the implies a decrease of a big negative impact that otherwise harms public budgets as has happened in the past. The present price level is also suitable for consuming nations, as these would need a relatively high price of oil to justify investments in the otherwise expensive alternative energy sector.

So why [is OPEC] a lifeboat? Through its policy on oil production, the organization has succeeded in maintaining oil prices at a reasonable level. It has also succeeded, through production cuts, in credibly and sincerely defending prices, in the wake of their collapse at the start of the global financial crisis (falling to nearly 30 dollars per barrel), all without dealing any blows to the global economy. In addition, the majority of OPEC’s member states have since injected the necessary funds for investments and new projects, particularly in the petroleum sector, in contrast to the deflationary policies of the industrialized nations which, first and foremost, attempted to rescue their crumbling financial institutions,

... why is the metaphorical sea turbulent? The road that lies ahead of OPEC is not paved with roses, and is instead full of bumps and pitfalls, in the organization’s quest for price stability at the desired levels: There are, first, the global economic crises which are yet to end.

... Add to that the persistent attempts by industrialized countries to develop new alternative energy sources, at the expense of conventional fuels. The best example of this is the turmoil in the markets and prices as a result of the introduction of shale gas, and its’ implications for the stability of the gas industry. This is not to mention Germany’s decision to continue operating its aging nuclear power plants for decades to come, despite strong domestic opposition.

There are also the ongoing media campaigns in the industrialized countries that promote "pipe dreams" when it comes to alternative energy sources, as though these latter will replace fossil fuels at any point in the foreseeable future, or produce no pollution. A good example of this is the hidden financial support provided by the governments of industrialized nations for alternative energy sources, while simultaneously imposing high taxes on oil, which creates a kind of ambiguity in determining the actual costs of the various types of fuel.

The campaigns mentioned above also promote the idea of “peak oil”, which casts doubt on the ability of oil-producing countries, especially in the Arabian Gulf, to meet future global demand for oil. This exacerbates the problems of investing in the oil industry and incites the public opinion against it, progressively and adversely impacting investments in this industry or demand for its products.

*Published in the London-based AL-HAYAT on Oct. 17, 2010. The writer is an energy expert.
(18 October 2010)

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