Economic Challenges in the Clean Energy Supply Chain: The Market for Rare Earth Minerals and Other Critical Inputs
Hensel, Nayantara D., Business Economics
The past few years have witnessed an increased impetus toward renewable energy to replace fossil fuels that has been driven both by environmental and national security concerns. Recent political instability in North Africa and the Middle East has added to concerns about the security of petroleum supplies. Nevertheless, renewable energy technologies are also exposed to supply chain risks for key inputs, especially rare earths, for which China is the dominant supplier. Rising price pressures in the rare earth market, due to increased demand, as well as China's tightening of export quotas, have magnified concerns about the availability of rare earths. This has led countries to develop strategies to find other sources, to substitute other materials, and to recycle. Over the longer term, the viability of the market for rare earths is dependent on the growth in demand for products requiring rare earth, the ability to find alternative supply sources to China, and possibly increased government support.
Business Economics (2011) 46, 171-184.
Keywords: rare earths, clean energy, China, energy security
The impetus toward clean energy technologies has strengthened recently not only due to the perceived benefits of a reduced carbon footprint, but also due to the desire to reduce dependency on other nations for petroleum resources. The Obama administration has emphasized the importance of clean energy and has proposed that as much as 80 percent of electricity by 2035 should be derived from clean energy sources--wind, solar, nuclear, and "clean" coal [Doggett 2011]. Recent developments in the global arena have further served as an impetus toward examining clean energy technologies. The recent political instability in the Middle East and its impact on the volatility of oil prices has led to rising gas prices and has provided an impetus to the potential for reduced consumer spending that, when combined with rising inflation (due to higher food and energy prices), could slow economic growth in the United States and in other countries. Moreover, the tragic disaster in Japan has led to a re-evaluation of nuclear energy, relative to renewable energy, coal, oil, and natural gas.
Despite the benefits of clean technologies through reduced carbon emissions and less energy consumption, key natural resources are important for these technologies. As with oil, the supply chains for energy efficient technologies have significant risk due to the resource dependency on other countries for these inputs. This article assesses the potential risks inherent in clean energy technologies in terms of increasing resource dependency on some countries for the underlying critical resources, while reducing the risk of dependencies on other countries that are key in petroleum markets. The first section discusses the pattern of shifting dependency on Middle Eastern countries for petroleum. The second section discusses the importance of rare earth minerals in energy-efficient technologies--hybrid motors, wind power, etc--and the strategies to diversify international dependencies on China. The third section discusses the potential for disruptions in the supply chain for other types of critical resources needed for clean energy-related technologies, and the fourth section concludes.
1. U.S. Dependencies in the Oil Markets and the Impetus for Renewable Energy
The recent developments in the Middle East have led to volatility in the oil markets and have fueled concerns about U.S. dependence on Middle Eastern countries for oil imports.
Indeed, oil prices increased 16.79 percent in the first quarter of 2011, compared with a 15.15 percent gain in all of 2010. In 2008, when oil prices reached $147 per barrel, OPEC members had little spare capacity--only 1 million barrels per day--to produce more oil to lower prices. As of the spring of 2011, OPEC had a spare capacity of about 5 million barrels per day. …