21st Century Energy? Dig, Baby, Dig!

By Daniel McGroarty

There are times when a single issue illuminates unspoken assumptions that percolate just below our policy debates - questions concerning when inter-dependence becomes over-dependence, and how the U.S. meets basic industrial needs in a post-industrial economy.

Case in point: This month's Government Accountability Office (GAO) report on rare earth metals, a complex of 17 of the more esoteric elements in the Periodic Table.

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The report itself - "Rare Earths Materials in the Defense Supply Chain" - is hardly the stuff to set hearts racing. But policymakers will ignore the report not simply at their own peril, but ours as well. That's because the GAO paints a portrait of a U.S. economy and military industrial complex dangerously dependent on a single source of foreign supply - China - for a range of critical materials. As for how we find a way out of this dependency, here's the GAO's money quote: "rebuilding a U.S. rare earth supply chain may take up to 15 years ..."

What's the basis for this bleak assessment? The GAO looks across the supply chain, from mining rare earth ore, separating out rare earth oxides, refining them to varying degrees of purity, forming the resulting metal into alloys and on to the final stage: manufacturing those alloys into specialized components used in every-day devices from cell phones and computer hard drives to specialized defense applications like precision-guided munitions and missile defense radars.

The catch: Right now, there is no U.S. rare earths mine in operation, no U.S. refining capacity and only limited separation facilities and alloy production capacity.

As a result, the U.S. presently produces no neodymium iron boron magnets - needed for the actuators that make "dumb" bombs smart and a critical component, the GAO notes, on the U.S. Navy's Arleigh Burke class guided missile destroyers. Today, these key components are made by U.S. defense sub-contractors -- under Japanese patent processes from rare earth ore sourced from China.

The mammoth rare earths mine at Mountain Pass, California - which supplied the bulk of all rare earths for U.S. industrial uses from the mid-1960s to the mid-1980s - has been shut down for nearly a decade (in 2008, Mountain Pass began to process decades-old ore heaps into limited quantities of some but not all of the 17 rare earths). Further down the supply chain, between 2003 and 2005, rare earths magnet producing plants in Kentucky and Michigan also closed their doors.

It all adds up, as the GAO notes, to a situation in which China wields market power: "The ability of sellers to exert influence over the price or quantity of a good, service, or commodity exchanged in a market."

How much "market power" does China have? Consider this nugget buried in the bill put forward by Congressman Mike Coffman (who deserves credit for seeing the developing rare earths crisis): On the way to proposing that the U.S. institute a strategic stockpile of rare earths to offset our dependency on China, Coffman's bill includes a mechanism allowing the U.S. to build its stockpile by buying rare earths - from China.

The prospect of reducing U.S. dependence on Chinese supply through a policy of buying Chinese rare earths is a weird reverse-spin on Lenin's dictum about capitalists selling revolutionaries the rope with which to hang themselves. Will we really be able to rely on the rulers of the PRC to provide the rare earths that keep our military sharp and our economy humming - ahead of their own bottomless economic needs and national security calculations?

We might have no choice, if China's advantage is simply a fact of life; if, in the great global game of resource allocation, geology has dealt the rest of the world a bad hand. But that's not the case. In fact, "rare earths" are anything but: China may provide more than 95 percent of the world's current supply, but significant rare earths resources exist outside the People's Republic. According to the U.S. Geological Survey, America is home to known rare earths resources amounting to 12 percent of total global tonnage, spread across seven states. Canada has seen several major new finds in the past decade, as has Greenland - under Danish administration, a NATO ally. Add ANZUS ally Australia, another rising rare earths player, and more than 25 percent of known global rare earths resources are on - make that under - friendly soil.

So getting back to the GAO report, what about re-growing our own domestic mining capacity, even if it takes 15 years to do it?

The hard truth is that reversing market power isn't that easy. All of the advantages that typically flow in a market-oriented investment climate like the U.S. become potential choke points - opportunities for the market power to press its thumb on the scales. Consider the capital risk Catch-22: U.S. investors will be wary to put capital at risk funding U.S.-based rare earths mining projects while China has the power to depress global prices and tank ROI estimates - while domestic rare earths processors will be reluctant to bring plants online if there's no predictable U.S. supply of rare earths ores. After all, it's happened before: China's rapid ramp-up in rare earths production in the 1990s depressed global prices to the point where the red ink led U.S. and other rare earths producers to shutter their mines.

Add in the environmental hurdles - and there are serious hazards in rare earths mining that must be mediated and monitored, adding costs to each metric ton of U.S. rare earths - and China reaps a price advantage by running mines with far fewer environmental concerns and controls. Again, past is prologue: The U.S. rare earths mine at Mountain Pass was shut down in 1998 for leaking toxic effluents into area lakebeds. Reopening it required negotiations with 18 different California regulatory agencies.

Take all these factors together, and China has all the levers it needs to forestall the United States' reentry into the rare earths business - from 15 years to forever.

Of course, the GAO's mandate is to outline the problem, not devise a solution. That's a job for U.S. policymakers. Their first task will be to move a mountain of assumptions about who we are as a nation, and what we do in the world. The decline of domestic rare earths mining that's created a dangerous foreign dependency is emblematic of a larger issue. In the past generation, the U.S. has become a nation of "symbolic analysts," interested in making our livings by manipulating spreadsheets, designing websites, devising marketing plans (writing op-ed articles) - more likely to invent a synthetic derivative Rare Earths Collateralized Debt Obligation than to get our hands dirty with the real thing.

We've grown more and more used to doing less and less mining and manufacturing here in the U.S., leaving that messy business to other folks in other climes from whom we can simply buy the stuff anyway. From the rare earths perspective, we gave China the opportunity it is now exploiting. From a larger resource supply perspective, rare earths are just one of 33 critical minerals and metals for which the U.S. is 75 to 100 percent dependent on foreign sources of supply.

In 2008's presidential season, the debate on energy independence rapidly devolved into the stump-speech slogan "Drill, Baby, Drill!" with free-market advocates on the right raring to sink wells and pump oil, and the environmental left opposed to petro-power outright, jonesing for alternative sources of energy like the wind and sun.

The rare earths shortage is going to upend that familiar dynamic. With rare earths needed for everything from main battle tanks and Hellfire missiles to wind-farm turbines and solar panels, it's possible to see the outlines of a hawks-to-hippies alliance favoring a U.S. revival of rare earths mining. "Dig, Baby, Dig!" may exceed the rhetorical proprieties of a GAO Report, but the message for the U.S. is clear: If we mean to maintain even a chance at resource security, we need to rediscover the value of mining the raw materials we depend on to run a 21st Century economy - and a 21st Century military.

Daniel McGroarty, principal of Carmot Strategic Group, an issues management firm in Washington, D.C., served in senior positions in the White House and at the Department of Defense.

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