The Great Geologic Map of North America

This is one of the most visually impressive maps ever created by the United States Geological Survey (warning: 23 MB picture). A reduced version is linked below, and other versions can be found here. This map took over a decade to complete. It was constructed as the end result of a joint project of members of the American and Canadian Geological Surveys. Though slightly out of date, it is in my opinion still the best geological map in the world.

Given the dozens of news articles that have been coming out in recent weeks regarding the resource potential of the Arctic (a matter that I’ll soon be addressing), I think that it’s only a matter of time before this map is expanded to account for the North American seabed. As Defense Secretary Leon Panetta recently stated, in regards to American interests in the far north, “…not since we acquired the lands of the American West and Alaska have we had such a great opportunity to expand U.S. sovereignty.”

GOP opposition to the ratification of the Treaty of the Law of the Sea, despite the broad range of military, environmentalist, and business interests that support it is hindering the growth of the American presence in the far north. This, again, is a topic that I’ll soon be addressing. Suffice to say, it looks like control of the Arctic Ocean and its many physical resources and trade routes will be one of the next great theatres of global resource conflict. The ongoing situation demands close attention. The article I’m currently writing on the topic will be rather comprehensive – covering the eight arctic industries that I think will benefit the most from global warming.
In the meanwhile, enjoy the map. Trust me, it is even more stunning in person.

 

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Returning to the Department of Energy’s Critical Materials Strategy report

In December of 2010, the Department of Energy released the first of its “Critical Materials” reports, which summarize the DoE’s view of the short and longer term challenges to global supplies and American access to sixteen elements deemed essential to high technology and the production of advanced manufactures. These elements include the most critical of the rare earth elements (HREEs specifically) and certain other metals in which the supply streams feeding American industry are judged to be particularly fragile. This article will point out the highlights and summarize the updated Critical Metals report, which was released three days ago. I also editorialize where doing so seems appropriate.

Before moving on, it is worth noting that only a year has passed since the release of the first Critical Materials report. By the standard of government commissions, this publication speed is incredible. Many commentators of the financial and extractive industries have noted how vulnerable the American economy is to interruptions of supplies of many raw materials. Oil is only the start of an extensive laundry list of supply stream weaknesses that have alarmed policymakers throughout the past year as the extent of the resource stream weaknesses became more broadly known. Several legislative acts have been proposed to deal with this problem, primarily Senator Lisa Murkowski’s (R-AK) S. 1113 proposal and representative Mike Coffman’s (R-CO) H.R. 2184, the RESTART Act. Both were proposed this year in order to create a task force consisting of the Secretaries of State, Energy, the Interior, Agriculture, Defense, Commerce, and other persons deemed appropriate for inclusion. This task force would review laws and regulations that discourage domestic rare-earths mining and research, speed up permitting and lighten regulatory burdens, and provide rare earth miners with necessary contacts via networking and provide other information. Both bills are currently tied up in committee.

Summarizing the Report:

Highlights: Chapters 1-5

  • The demand for critical materials has in almost all cases grown more quickly than the demand for steel (~8% per annum).
  • Global supplies, of REEs especially, have been slow to respond to price increases because of long development times for new projects, lack of capital (symptomatic of how small the market size for these materials are, hence Wall Street’s relative ignorance to these opportunities), trade barriers and other factors. Supply pressure is expected in several HREEs through the remainder of the decade, while LREEs are not anticipated to have supply problems.
  • Lighting efficiency standards that are now coming into effect around the world (2012 in the U.S.) are going to cause especially fragile supplies of the HREEs used in efficient lighting, the HREEs being europium, terbium, and yttrium.
  • The DoE does not expect supply concerns in LREEs (lanthanum and cerium in particular) to last for much longer. In particular, the DoE does not expect supply concerns in LREEs used in “cracking” the heavier molecules in crude oil into lighter molecules that mostly compose fuels like gasoline and jet fuel, to be significant forward-going problems. Refiners have months of cracking material on hand, and have been taking successful steps to significantly reduce the amount of REEs used in these materials.
  • The wind turbine industry is shifting towards the use of much larger and more powerful turbines produced in prior years. These larger, slower, but more productive turbines are projected to use several hundred kilograms of rare earths (mostly HREEs) per turbine in permanent electro-magnets (PEMs). Given the growth of wind energy, this factor is highly bullish for near-term HREE projects like Great Western Minerals’ Steenkampskraal resource.
  • Organizations the world over are acting to reduce the amount of dysprosium used in PEMs. Dysprosium is used to increase the Curie Temperature of PEMs (the temperature at which PEMs demagnetize).
  • Lithium-ion batteries do not use REEs, but do use other critical materials like cobalt, manganese, nickel, and graphite (the latter of which was not listed by the DoE as a critical material, but really, really should have been). Further link.
  • The world is not running out of minerals. There is no imminent “peak” in the production of any mineral resource the DoE analyzed. But, costs are generally increasing as the more easily exploited resources are exhausted.
  • 60% of the costs of finished rare earth oxides derive from the separation and processing steps, rather than costs directly associated with mining. The capital expenditures to bring a mine online (ranging from $100M for brownfield mines to $1B for greenfield mines) represent a significant barrier to entry for would-be producers that need to develop capital (roads, plumbing, electricity, etc.) in addition to mining facilities. This is not good news for rare earth projects that are coming online years down the road, or in other words, 90%+ of ‘rare earth’ companies. The rewards of the rare metals market will go to those companies that are in production in the near term, like Molycorp and Great Western.
  • Nearly all of the intellectual capital associated with the rare earth elements lives in China. Where the number of people holding college degrees who work in rare earths in the U.S. is in the low hundreds (~200), in China this population number is over 65,000. Various universities in the U.S., however, are receiving government grant funding and are working forwards expanding their rare-earths research programs. The lack of an adequate workforce is a significant barrier to the establishment of domestic REE supply chains.
  • Demand for rare earths is projected to increase from its current levels at a compound annual growth rate of 3.6% from 2010–2020, and at a compound annual growth rate of 2.9% from 2021–2025.
  • Price volatility in the rare earths has led to hoarding by industrial consumers, and has reduced the average contract length for supplies from one to five years to an average of three months – or pervasive de facto spot price transactions.
  • The report summarizes the critical materials policies of other world powers.
    • The Chinese government is struggling to stop illegal smuggling, but is successfully consolidating the industry, thereby reducing total production. The Chinese government has successfully captured a great deal of global manufacture of finished rare-earth products through its export quotas and taxes (export taxes average at 15%-25% depending on the specific metal), which all but force producers of PEMs and other applications to construct their plants in mainland China, thereby gaining access to inputs at lower costs. 76% of REE PEMs are now produced within China’s borders. Baotou Steel and Iron Group intends to stockpile 300,000 tons of REOs by 2016 (compare to current Chinese annual foreign exports of REOs, which are about 30,000 tons. Also note the contrast to total global production, which was 105,800 tons in 2010).
  • The European Union released in 2010 its own critical materials report, covering 41 separate mineral resources of concern. The study is very much worth reading for any investor in the critical materials. The policy proposals are limited in scope, generally dealing with proposals for increased co-operation by EU members on resource and recycling policy. The research is however highly useful.
  • Britain is also researching the fragility of its economy to resource dependency. Not surprisingly, REEs, platinum-group-elements, graphite, antimony, and other technology or specialty ferrous metals are near or at the top of their criticality list.
  • The Japanese government is very pro-active in dealing with resource supply stream weaknesses, a reflection of that nation’s dearth of domestic mineral resources. The Japanese government authorized JOGMEC (Japan Oil, Gas, and Metals Corporation, a government entity that has traditionally provided financing and loan guarantees to aid large Japanese corporations in establishing reliable hydrocarbon supplies) to extend its financing to ventures in metals and mining in the form of loan guarantees and direct equity investments. JOGMEC also collects data on Japanese resource consumption, maintains resource stockpiles, and provides scientific funding to universities and corporations in order to further develop new and more efficient uses for resources. Japan committed $650M in fiscal 2011 to alleviate supply pressures associated with critical materials, including REEs, and has set aside $1.3 billion in total to alleviate Japanese vulnerability to the rare-earths market (contrast that to the total size of the REE market, which was roughly $3 billion in 2010).

Japan is making significant progress in reducing REE consumption, having for example reduced new cerium consumption by 50% through recycling and substitution. Note that this figure applies to the entire nation’s consumption of cerium.

  • I would also point the reader towards Nouriel Roubini’s excellent ’09 article in Forbes regarding the rise of resource nationalism. Given depletion dynamics in certain key commodities and price increases in the commodities complex as a whole, it is inevitable that state authorities the world over will be inserting themselves more deeply into resources and the policies and production thereof. Resource nationalism is more a matter of when than if, a trend that the DoE did not address in the depth that the subject demands.

Specific critical materials of potential investment concern:

  • Lithium: The Doe expects significant supply and demand variance in lithium, albeit in the 2016-2020 timeframe depending on the strength of demand. The DoE has for all concerned minerals graphs constructed varying ‘scenarios’ of supply and demand that for the most part depend on the penetration rates of new technologies such as electric vehicles, larger wind turbines, and REE electromagnets. These scenarios, or ‘trajectories’ point out the timeframe in which the DoE expects demand to overtake supply, if at all, for the various critical materials.
  • Manganese dioxide: In manganese dioxide, which is primarily used for the production of dry-cell batteries (not lithium-ion batteries), and to a lesser extent as a pigment in paints and ceramics, the DoE expects significant variances of supply and demand. Current production of manganese dioxide, currently 790,000 tons annually, is expected to by 2015 only increase by 50,000 tons per year. This could be highly problematic for producers of dry-cell batteries, but at the same time, quite bullish for producers of EMD.

  • Electrolytic manganese: Oddly, the DoE did not address supply fragility in high-purity manganese. China possesses a 97.9% global monopoly over this market, with the remainder coming from one South African company. The EMM market has grown at an average page of 26% per year for the past five years. EMM is essential to the production of high quality steels and lithium-ion batteries. . The CPM Group has recently released a very interesting report on the electrolytic manganese (99%+ purity) market. CPM Group expects supply capacity strains in EMM as well, resulting in an average price through the coming decade far above current and past prices. Chinese manganese production is expected to fall by a third to a half in the next three to five years. The effects on exports are a matter of conjecture. China currently places a 17% VAT tax on input costs and 20% export tax for all manganese products that are exported abroad. The U.S. furthermore places a 14% import tariff on manganese products. The U.S. is 100% reliant on imports of manganese. It is quite possible that electrolytic manganese could be subject to a supply panic in the near term, like what occurred in the rare earth metals market. This would be highly bullish for American Manganese, a Canadian company working to develop its massive placer resource in Mojave county, Arizona. If AMY comes into production, it will be by far the lowest cost producer of high-purity manganese in the world, and would evade both Chinese and American import/export duties. In my opinion, EMM should have been near the top of any comprehensive critical materials report. The exclusion of EMM, graphite, platinum-group elements, and other technology metals were highly conspicuous absences in this DoE report.
  • Neodymium: In neodymium, the DoE expects supply to stay ahead of demand in the medium term except if the penetration rate of new clean energy technologies are at the upper end of demand estimates. If these estimates turn out to be accurate, significant new supplies will be required after 2015-2018, beyond even what Molycorp and Lynas are capable of bringing to market.

  • Dysprosium: In dysprosium, the DoE expects little possibility of supply catching up to demand in the near or the long term, barring significant R&D breakthroughs that greatly reduce the input intensity of this metal. This is quite bullish for HREE miners, as the sheer extent of the expected supply and demand variance of this metal seems to ensure that HREE miners can ‘name their price’ at will.

With that being said, dysprosium is one rare earth element above all others in which the industry is trying to engineer lower input intensity (amount of dysprosium per completed finished good). Ames Laboratory (the original entity that engineered REE applications such as permanent electromagnets  in the first place, in response to a 1970s cobalt supply crisis), Molycorp, and multiple Japanese multinationals are expending considerable money and talent in an effort to engineer magnet technologies that require much less or no dysprosium. They are doing this because the spot cost of dysprosium has been highly damaging to the profitability of product lines that require much of this metal, and because industrial consumers see no relief on the horizon. It is a matter of sheer speculation as to whether or not breakthroughs come through in the near term, but it is important to keep in mind the sheer effort regarding rare earth innovation occurring worldwide at this very moment.

The DoE report covers several other materials, but barring highly specialized investment strategies, few of these materials appear to be exploitable by investors barring physical delivery.

Other graphs:

This chart shows the demand growth of critical materials versus that of the reigning metals benchmark, iron & steel.

This graph shows changes of ‘criticality’ in this new DoE report versus the department’s perceived criticality state of the same materials one year ago.

These graphs respectively show the criticality of materials that the DoE covered in the short and in the medium term.

Chapter 6: Summary & Highlights:

This final chapter summarizes the DoE’s efforts, primarily pursued through co-operative efforts with other institutions and through R&D initiatives/grant funding to reduce pressure in the rare-earths market. The DoE is pursuing some highly interesting innovations, but results are yet forthcoming. Those interested in the science of the rare earth elements should probably read this section in full, because the DoE is funding and promoting some highly interesting research, through it looks like none of the research will have a near term effect on the rare earths/critical materials markets.

Appendix: A: In this section, the DoE provides detailed criticality assessments for every element of concern in the report. I highly suggest that the reader read this section in full. Summarizing this appendix would take many pages.

Appendix B: I highly suggest also examining this section in full. Here the DoE summarizes the relative and absolute amounts of elemental inputs that make up the various types of nickel-hydride and lithium-ion batteries, lighting bulbs, and wind turbines. This section is very interesting. For example, in electric vehicle batteries of the type the DoE analyzed, manganese makes up 57% of the total weight of the battery, nickel, 29%, while lithium only composes 7.9% of the battery. These relative compositions are identical for hybrid-electric-vehicles and plug-in hybrid vehicles.

Appendix C: I would also suggest examining this section in full. Here the DoE summarizes the details and state of progression of all pending legislation that would affect the rare earth elements market and that of other critical materials. Proposed legislative measures would provide $70M in loan guarantees to innovators in downstream rare-earths research, mandate the Department of the Interior to conduct comprehensive surveys of domestic rare-earths mining potential, establish a government stockpile of rare-earth electromagnets, conduct broader surveys of the mining potential of all domestic non-energy mineral resources, mandate DoE grants for other innovative and recycling initiatives, and provide $10M of grant funding per year to lithium-ion innovators.

This appendix concludes with three pages that summarize Senator Lisa Murkowski’s  (R-AK)Critical Material’s Policy Act of 2011. Murkowski’s legislation covers a broad range of territory, allocating roughly $40M to see the proposals through. This legislation is a credit to Senator Murkowski’s understanding of the resource limitations that will strain this nation and the world at large. Significant highlights include loan guarantees for critical metals innovation, mandating the Department of the Interior to publish an “Annual Critical Metals Outlook” report, which would feature the results of surveys of the critical metals, discussing the particulars of the supply, demand, and innovation concerning every single element. The legislation also features grant funding for universities that research critical materials innovation, and mandates the Department of Energy to prepare a comprehensive report on the viability and path to thorium-based nuclear energy.

Appendix D:

This section of the report summarizes the October 2011 Conference on Critical Metals for a Clean Energy Future, which had dozens of very high-profile materials scientists and politicians as speakers and attendees. The conference was jointly organized by the Department of Energy, the European Commission, and the Government of Japan.

Appendix E:

Here the DoE summarizes the activities of its Advanced Research Projects Agency where those activities concerned critical materials. The DoE has been provided nearly $80M of grant funding to develop early stage technologies that reduce or eliminate dependence on critical materials.  This funding has gone to universities, startups, and established corporations such as GE.

Concluding thoughts:

To investors and keen observers of the critical materials, most of what the DoE reported is already known. However, within the details some extremely interesting data cropped up which I have not seen reported elsewhere, hence why I decided that a summarization of this Report would be a worthwhile undertaking. However, the DoE’s exclusion of other non-elemental materials, like electrolytic manganese and graphite, is a highly conspicuous weakness in the thoroughness of the DoE’s report. The mineral and energy authorities of other nations have not, at all, restricted their analysis to narrow degrees as the DoE did. To conclude this article, I’m attaching the European Commission’s criticality matrix of the 41 materials the EU covered. It is my opinion that the European Commission did a much more thorough job in their research and analysis of the critical materials. I’m also attaching the Department of Defense’s survey as of 2010 of net import reliance of critical materials, a survey that is much more comprehensive than that which the DoE offered.

Oil – The Next Revolution

EXECUTIVE SUMMARY (Excerpt of the full text)

Contrary to what most people believe, oil supply capacity is growing worldwide at such an unprecedented level that it might outpace consumption. This could lead to a glut of overproduction and a steep dip in oil prices.

Based on original, bottom-up, field-by-field analysis of most oil exploration and development projects in the world, this paper suggests that an unrestricted, additional production (the level of production targeted by each single project, according to its schedule, unadjusted for risk) of more than 49 million barrels per day of oil (crude oil and natural gas liquids, or NGLs) is targeted for 2020, the equivalent of more than half the current world production capacity of 93 mbd.

After adjusting this substantial figure considering the risk factors affecting the actual accomplishment of the projects on a country-by-country basis, the additional production that could come by 2020 is about 29 mbd. Factoring in depletion rates of currently producing oilfields and their “reserve growth” (the estimated increases in crude oil, natural gas, and natural gas liquids that could be added to existing reserves through extension, revision, improved recovery efficiency, and the discovery of new pools or reservoirs), the net additional production capacity by 2020 could be 17.6 mbd, yielding a world oil production capacity of 110.6 mbd by that date. This would represent the most significant increase in any decade since the 1980s…. the economic prerequisite for this new production to develop is a long-term price of oil of $70 per barrel. Indeed, at current costs, less than 20 percent of the new production seems  profitable at prices lower than this level.

Matthew Simmons, energy investment banking CEO who made world headlines with his definitive work, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, was wrong. Peak oil is not coming, nor is it on the near-term horizon. The gist of Simmon’s exhaustive and indisputable research was that about 40% of global oil production came from less than a hundred “super-giant” oil fields, all of which had been discovered over thirty years ago and were already in a state of advanced age. He accurately argued that these venerable oil fields – the crux of seventy years of the global energy economy – were about to reach peak production and that no technology, however advanced it could be, would do anything more than slightly delay or ameliorate the production decline. Simmons over-reached, however, by arguing that unconventional production would never be sufficient to counteract the decline in production from the great super-giant oil fields. As can be seen below, Simmons was right, when he wrote in 2005, that conventional oil production was about to peak (conventional production peaked in 2006), but since then unconventional production has taken up the slack and then some.

The revolutionary changes occurring right now in the industry, spurred by George P. Mitchell’s discovery of how to use horizontal hydraulic fracturing techniques to profitably exploit tight oil shales are one of the most important and least foreseen factors currently at work in the American economy. However, as I have previously reported on, the benefits of this revolution in the energy markets are poised to be poorly distributed and otherwise impeded by an insufficient energy infrastructure. Pipeline bottlenecks have gotten so out of hand that Bakken oil is now being barged down the Missisippi. The national energy infrastructure is in the sorry state that it is because, as recently as ten years ago, no one anticipated the U.S. to become a resurgent oil power. In natural gas especially, every analyst was expecting (accurately) significant depletion of the nation’s conventional production, increasing the nation’s reliance on imports. $100 billion was invested in various LNG import facilities that are now largely redundant. Cheniere Energy is one of the firms that was founded in anticipation of increasing American LNG imports, and invested billions of dollars in building an import terminal that is now operating well below capacity.

As of right now, the U.S. has almost no operational capacity to export natural gas, aside from a relatively small Chevron-managed Alaskan facility that exports almost all of its product to Japan. This is an unusually extreme infrastructure failure due to, 1) the sheer profitability of successfully engaging in LNG exports, and 2) the thousands of buy-side and sell-side counterparties who would be willing to pay top dollar, right now, for the ability to export American natural gas if the capacity existed.

Cheniere Energy (ticker symbol:NYSE, AMEX: CQP) is the only U.S. company that will in the short to medium medium term have the ability to export natural gas to the rest of the world, where prices can from $14-$22 per mbtu. In the near future, I’ll be writing an article on Cheniere as an investment thesis.

In the meantime, I would suggest that you read the full text of the Harvard Kennedy School’s excellent piece of research, Oil – The Next Revolution, written by Leonardo Maugerie, a former ENI SVP and one of the world’s greatest authorities on the direction of the energy markets.

Copyright Law and U.S. Foreign Policy

The institutional structure of the United States is under stress. We might be in dangerous economic straits if the dollar were not the principal international reserve currency and the eurozone in deep fiscal trouble. We have a huge public debt, dangerously neglected infrastructure, a greatly overextended system of criminal punishment, a seeming inability to come to grips with grave environmental problems such as global warming, a very costly but inadequate educational system, unsound immigration policies, an embarrassing obesity epidemic, an excessively costly health care system, a possible rise in structural unemployment, fiscal crises in state and local governments, a screwed-up tax system, a dysfunctional patent system, and growing economic inequality that may soon create serious social tensions. Our capitalist system needs a lot of work to achieve proper capitalist goals. – Judge Richard Posner*

 

Why is the U.S. Federal authority fighting as it is, at home and around the world, to put in place draconian protections on patents and copyright? What is the economic meaning of copyright mandates such as ACTA, SOPA, and CISPA, and how do these legislations tie in to America’s hollowing-out of the State authority and the ‘real’ economy?

The reason is simple. The US has transitioned from being an industrial economy to a service economy and is beginning to take even further steps – to becoming a ‘post-industrial, information-based economy.’ By this point in the life-cycle of the service economy, the profit-motive of US corporations has destroyed most of this nation’s domestic ‘real’ production capacity by off-shoring massive parts of their production and development capability to China, India and other low-cost countries. Further movements in this direction will continue to degrade national potential.

Detroit no longer produces cars. Many of the cars made in the US are made by foreign companies. Plastics, paints, minerals, batteries, solar panels, wind turbines, cell phones, steel, computer chips, iPads, clothing, etc. come from China and other southeast Asian nations. Eminently powerful US corporations such as Nike, Apple, Intel, and particularly IBM achieved their current share values by entirely spinning off their physical production capacities and resorting to contractor-offshoring and the in-house production and ownership of intellectual property.

Even the US military has resorted to offshoring. The Pentagon now employs at least one civilian contractor for every service member on the battlefield. Even though half of the Pentagon’s budget pays for these private contractors, 82 percent of them are not U.S. citizens. In 2007, 7 of the top 10 corporations doing business with the U.S. Government in Iraq were not even U.S. companies. By late 2009, the breakdown of contractors in Afghanistan comprised roughly 9 percent U.S. employees, 16 percent third-country nationals, and 75 percent local nationals. By now in the post-Rumsfeld military, more than half of the American defense budget is going to foreign corporations. These civilian contractors are in many cases performing tasks, albeit at much higher cost, that the army used to do itself in-house.

The following is an excerpt of personal communications between a friend who is on deployment to Afghanistan and myself.

Most of the people on base here are local nationals or foreign nationals. Unless the job is technical or supervisory, the person is not going to be from the U.S. Virtually all menial labor is contracted to local nationals. Most of the foreign nationals work as either vehicle operators, food service, laundry, or other jobs where they interact with US troops on a daily basis and a basic working knowledge of English is required. Most of the laundry people are from Uganda, most of the bus drivers are Nepalese, and most of the chow hall workers are Indians. The Afghans work jobs that do not require knowledge of English. The Americans in the supervisory positions are grossly overpaid. For instance, the individual responsible for the chow hall, an African-American woman with only a high school diploma, is making roughly $120K a year out here. I gleaned that just from talking to her. The system is broken and built just to line the pockets of the contracting companies. The whole thing is a sham. Out here, DynCorp runs the show.

In summary, the physical productivity of the public and the private sector has been hollowed out by neoliberalism. What remains? Hollywood. The music industry, the medical industry, law, software and other e-technology, marketing, finance, the education industry, the private defense industry, and natural monopolies such as telecom and utilities. The first commonality that these sectors share is their post-industrial, abstract nature. These industries don’t create ‘things’, they create ideas or add final value to actual industrial supply chains that emanate from other nations. Or they perch atop monopolies. The second commonality is that every single one of these sectors, due to their abstract, post-industrial nature, absolutely needs the protections afforded by patent and copyright enforcement – these protections are all they have left, for it is only because of government power that their abstract goods can be distributed like real goods.

Patents and copyright are not real things. They are ideas enforced by government charter. Different regions around the world have different ideas regarding the extent to which non-real goods can be traded and sold like real goods. Some regions don’t regulate the trade of non-real goods at all. Thus, in the global neoliberal economy, it is essential for post-industrial industries to co-opt governments around the world into their business models. It is essential for these industries to force governments to grant intellectual property protections equal to, or superior to, real property. The US especially is pushing this theme because intellectual property is one of the only things that our economy has left. The real industry, with certain exceptions, has departed for greener shores where higher returns on equity are to be found. The neoliberal idea is not to own the methods of production, for physical plant and equipment is too capital intensive and long-term in an era of quick speculative returns made all the quicker by economic financialization. Rather, the neoliberal idea is to own the instructions for the methods of production, and to make others pay for using the instructions. This is why the American government is simultaneously maintaining the world’s by far most powerful military force and is forcing other governments to treat IP as real products. The former projects the power necessary for the latter aim to succeed. Statism and rent-seeking in intellectual goods go hand in hand.

The American neoliberal economy needs a unified global acceptance of patent and copyright protections, or else it will fail. This explains the immense power that the US is projecting to implement ACTA and other copyright-enforcement treaties. These measures are perhaps the final card that the neoliberal economy has to play – if the rest of the world refuses to become the US’ economic lapdog, the post-industrial neoliberal economy will fail and something else will have to take its place. But, what would that be? It would take immense gathering and reorientation of national policy to revitalize the parts of the economy that have rotted under neoliberalism, which would be incredibly difficult to bring to bear given the power of the short-term corporate profit motive in the political discourse, which abhors government intrusion in its ‘free market’ decisions.

This shift to a neoliberal, post-industrial economy reliant on intellectual property does not promote free markets. Intellectual property – better under­stood as monopoly or exclusionary privileges that are granted to private sector interests in exchange for public goods benefits –  in reality entrenches the power and privileges of large American corporations  and their shareholders. Thus IP protections, where they induce technological innovation or economic growth at all, do so in areas and ways that can be controlled through patents and IP. That means, for example, that patent protections on the genetic codes developed by Monsanto in plant breeding become the main focus of corporate responses to food crises caused by climate change, rather than uncopyrightable innovations that may require changing farming practices and the promotion of other public knowledge, or otherwise pursuing practices that financial profit can’t easily be extracted from. Finance, law, and the military complex become growth sectors in an economy reliant on IP, for these are the enablers and enforcers of IP. The growth of these sectors tends to come at the expense of ‘real’ sectors, for all three are parasitic on the productive economy.

Where national policy is concerned, the Federal authority has become increasingly incoherent under neoliberalism – a natural consequence when government is staffed by people who don’t even believe in government. IP’s true reason for existence, the promotion of innovation, is now given lip-service at best by policymakers on both sides of the political aisle. The voices of those who benefit most from a reasonable intellectual property agenda, genuine entrepreneurs, artists, and small businessmen, have long since been drowned out by a cacophony of parasitic and monopolistic corporate interests. It will be incredibly difficult to shift the national debate to a discourse that even recognizes these ills and can summon the will to reject the hardline stances of these interests. However, if our economy is to remain the world’s most innovative now and for the foreseeable future, this must be done.

* – http://www.becker-posner-blog.com/2012/06/capitalismposner.html

The implications of American resource dependency

Intel used only 11 mineral-derived elements in the 1980s, but may use up to 60 in the near future” – Michael T. Klare

“Saudi Arabia has oil, but China has rare earths.”- Deng Xiaopeng, former Chairman of the Communist Part of China, in 1991

“Rare earths garner most of the headlines, but we are 100 percent dependent on foreign sources of 17 other minerals and more than 50 percent dependent on foreign sources for some 25 more. For years, the government has been content to report on those facts – without doing much to change them.”  – Senator Lisa Murkowski (R-Alaska)

If you live in the western world, you never have to think about it. Flip a switch and the lights go on. Turn the knob and water flows freely for either your morning coffee or your choice of a hot or cold shower. The grocery stores are filled with fruits and vegetables all year long. If the growing season ends in this hemisphere, food is shipped in from elsewhere around the world: seafood and ramen noodles from Asia, chocolates and confections from Europe, fruits and vegetables from Latin America… even the poorest segments of the population are able to adequately feed themselves, to the point that obesity has become more of a social ill than malnutrition. If we don’t produce a given good domestically it will be imported from the lowest cost producer. The American supermarket’s food aisle is the apex of globalization and neoliberal comparative advantage.

This relatively easy lifestyle is made possible by cheap and abundant energy. Our farmers extensively use fertilizers made from hydrocarbons, to the point that ten calories of hydrocarbon energy go into every food calorie produced. Natural gas accounts for 23.4% of domestic energy production. Ninety-five percent of the energy used in transportation comes from various petroleum derivations. Our stores are stocked with goods from around the world; food is only the first of many goods that are the end result of globalized supply streams predicated upon cheap energy. These goods arrive by planes, trains, boats and trucks that all consume fossil fuels. Nearly everything that we eat, consume, or do is made possible through the cheap consumption of energy. Fossil fuels have created new landscapes of concrete and asphalt highways, parking lots, shopping centers and endless suburban sprawl. Crude oil, the most important primary energy source, has changed the very tempo of modern life by increasing the productivity of modern industry and accelerating the process of economic globalization. It is no stretch to say that, were it not for the alphabet soup of hydrocarbon derivatives, the Western enterprise would be decades behind its current state of socioeconomic development. At the same time, domestic production of crude oil has fallen roughly 42% from its peak in 1973, and presently 71.4% of oil demand is imported. This nation is utterly reliant upon oftentimes politically unreliable nations for the supply of its economic lifeblood.

The purpose of this article, though, is to show that oil is only the start of a long chain of foreign resource dependencies. The dependence of the United States upon foreign energy has been thoroughly discussed in the public domain, though misinformation remains pervasive. Peak oil is another matter, but that’s a subject for another day. What the political orthodoxy remains oblivious to is the American economy’s dependence upon foreign exports of the other natural resources requisite to economic growth, technological innovation, and social stability.

The U.S. imports very nearly 100% of its rare-earth elements, niobium, strontium, manganese, and bauxite, 78% of its cobalt, 94% of its platinum-group elements, 80% of its tantalum, and over 60% of its antimony, graphite, chromium, potash, and nickel. South Africa supplies over half of our chromium and cobalt. Brazil; 84% of our tantalum, Mexico; 91% our strontium; Canada; 87% of our potash…and this list extends to roughly two dozen other materials of which the majority of demand is imported;  the aforementioned were simply the most critical (irreplaceable) materials, and this isn’t even beginning to delve into the insanity that is oil. The cutting off of supplies of any of these commodities even to a limited extent, or the mere threat of even doing so, could be catastrophic to the American economy or our government’s ability to effectively project power in foreign policy. The risk of this occurrence is dire, due to excessive single-source reliance in every one of these markets. Over 95% of our imports of REEs and manganese, and over 60%, of graphite, niobium, and antimony come from China alone, which has been placing export quotas and taxes on all of these resources for preferential domestic consumption. China already has a record of using its resources monopoly as a lever in foreign policy, which became clear to the world when the country cut off its exports of rare earth elements to Japan in 2010 over an incident of political caprice. Japan promptly surrendered, giving China a great victory in its political power position over its neighboring nation.

This graph shows the extent of the country’s resource-import reliance as of 2010. If oil were on this list, it would be #42, with a 57% import dependency as a percent of total consumption. The second graph shows the importance of non-fuel natural resources to the American economy. These points of data make it clear that American resource dependency is a topic that demands more involvement by policymakers and more awareness from the citizenry – the issue is too important to be left to the politicians. Both graphs are sourced from the USGS 2010 Mineral Commodities Annual Report.

This undesirable, fragile situation mortgages the health and stability of the U.S. economy to other nations, many of whom have less than amiable relations with our government. Furthermore, it renders our economy vulnerable to unforeseen catastrophes such as the recent Japanese earthquake that effectively shut down a critical part of the just-in-time supply stream of many of America’s greatest international companies.  This dependency renders our economy, and thus our ability to project political and financial power abroad, vulnerable to foreign political caprice, compromises national security, and exposes the business community to protectionist policies that lead to competitive disadvantages against foreign rivals. Until this situation is at least partially dealt with, unjustified volatility in the commodity and stock markets, increasing pressures on our business community, and by extension, negative effects on GDP and employment growth are all but assured. The failure of our political leaders to recognize these issues is sheer madness. It points towards systemic blindness in the highest echelons of power. These pressures could have been partially alleviated by the maintenance of the massive Cold-War era strategic mineral reserves, which in the aggregate accounted for millions of tons of practically every industrial commodity. Regrettably, however, these reserves were sold off during the Bush I and Clinton administrations during a bear period in commodity markets after the end of the Cold War, meaning that strategic reserves were sold off for pennies on the dollar while further suppressing prices by merit of the massive amount of excess supply of these minerals sold on the open markets, which in turn led to job losses, underinvestment in, and the destruction of supply streams in the domestic mining industry, which directly led to our present reliance upon foreign imports. On a side note, this process is a major reason for the strong corporate profits, stock markets, and low inflation of the ‘90s – low input costs.

I agree with Jeremy Grantham. I am convinced that the volatility we’ve seen in commodity prices over the past few years is emblematic of an irreversible shift in the supply/demand picture for all commodities. Proponents of the index speculation thesis, who argue that the prices of commodities have been raised through the financial effects of billions of dollars of long-only index fund investing, raise many excellent points but fail to explain why all commodities, even those that aren’t financially traded, increased in value as a result of speculation in 2008. The true reasons for the current bull market in all commodities are deeper than mere speculation. Specifically, Grantham stated, (note the below graph, constructed by his asset management firm)

“The history of pricing for commodities has been an incredibly helpful one for the economic progress of our species: in general, prices have declined steadily for all of the last century, in apparent defiance of the ultimately limited nature of these resources. The average price falls by 1.2% a year after inflation adjustment to its low point in 2002. Just imagine what this 102-year decline of 1.2% compounded has done to our increased wealth and well-being. Despite digging deeper holes to mine lower grade ores, and despite using the best land first, and the best of everything else for that matter, the prices fell by an average of over 70% in real terms. The undeniable law of diminishing returns was overcome by technological progress – a real testimonial to human inventiveness and ingenuity. But the decline in price was not a natural law. It simply reflected that in this particular period, with our particular balance of supply and demand, the increasing marginal cost of, say, 2.0% a year was overcome by even larger increases in annual productivity of 3.2%.”

 

As for mining globalization, the only mining ventures today that have the potential to be profitable on a stand-alone basis without capturing more value by expanding into downstream processing, refining, and fabrication are those that can produce at the lowest cost in the global marketplace – transportation costs are very nearly no longer an issue except for truly low value commodities like sand, salt, and gravel. America cannot hope to profit in this sphere. The highest quality mining resources are to be found abroad (though the potential of the U.S. to unilaterally supply domestic consumption, especially with NAFTA included, should not be underestimated). If one of our national priorities is to be “re-insourcing”, or the re-capturing of base supply chains, it is key is to explore for and expand upstream supply chains throughout NAFTA and capture as much of the downstream supply chain as possible within our own borders. Our mining industry can only prosper in an ever more complex, downstream-biased global marketplace by vertically integrating. This is smart globalization. Free trade that doesn’t keep an eye on national priorities is a byword for capitalist blindness. Business and patriotism don’t mix. Globalization must be compromised with some degree of autarky, for capitalism is incapable of serving long-run national interests to the same degree that a coherent national materials policy would and must.

America’s share of the North American market for producing end use technology materials is 90%,[1] but the production of those materials and at least half of the requisite supply chains can be constructed in Canada. This is not a bad thing. Pro-NAFTA autarkic development will in the long-run benefit the United States more than if it focuses on only its own development. There has never been a better opportunity to make NAFTA into the basis for a world class technology materials production economy. The response of American and European style capitalism to this new interest in commodities, especially “technology”[2] commodities, has until now been to treat it as a problem to be resolved along traditional capitalist lines by raising the prices of the affected “commodities” until the “opportunity for profit” thus created resulted in additional supplies to relieve, or at least, to limit, the upward price pressure. American style free market capitalism does not believe in natural resource exhaustion except as a scare tactic to drive share or commodity prices. This capitalism is incapable of crafting a coherent national policy where true exhaustion is a factor. The government needs to do this task itself, as our capitalism left to its own devices would harm, rather than serve, the national interest.  Our capitalism’s disinterest in commodities makes sense when it’s considered that increasing the rate of production of extractive resources is capital intensive, uncertain, and time consuming, which means, of course, that it must be a low profit endeavor when ranked against speculation. Our capitalism does not lead to a coherent industrial supply chain.

Twenty-five years ago, when the transfer of labor intensive manufacturing to low labor cost countries was begun in earnest, the main driver for American industrialists was cost control as a method for the retention of market share in a very competitive market place then just beginning to feel downward price pressure from Asian, predominantly Japanese, and European imports. American industry literally taught the world how to build and equip workshops to economically mass produce consumer goods. The industry was financed by a capitalism which counted success as the marketing of mass produced products made at the lowest cost that could be sold at a profit. However, American industrialists never worked under a national industrial policy, so that when the opportunity arose to lower costs simply by exchanging the American for a lower cost labor workforce there was no ethical or government barrier. The short term goal of maximizing profit was paramount. Few persons in government or industry were concerned with the long term consequences of such a workforce shift. As a consequence the very education and human capital required to re-start these supply chains in the U.S. is lacking, making the task much more difficult than it could have otherwise been. Only 200-300 people who have at least B.As work in the rare earth elements in any capacity (industrial or academic) in the United States, whereas in China the number is more along the lines of 66,000.[3]

The USA cannot hope to supply the BRICS with structural metal ores or their fabricated products, or other low-value goods only barely removed from industrial commodities in the supply chain. Our capitalism has not created a corporate entity capable of competing with former state-owned enterprises such as Vale, Rio Tinto, BHP Billiton, or the Chinese or Indian equivalents. Our structural metal industries cannot now, and have been unable to compete against these entities since the mid-1990s. It is truly regrettable that the U.S. doesn’t have a multinational minerals and metals conglomerate as powerful as the aforementioned firms. Our closest equivalent, Freeport McMoRan, is dwarfed by its foreign competitors in both market capitalization and labor force size. – though it is, at least, a start. Getting beyond the industrial commodities though, there is still time remaining for the USA to become a “technology materials” powerhouse for ourselves and for the world. These are the high-value niches in the commodity space that the U.S. could establish significant competitive advantages in due to our superior technology and university infrastructure.[4]

North America is highly enriched in a wide spectrum of technology metals.[5] When NAFTA is included our subsoil is more than enriched enough to assure self-sufficiency throughout the periodic table. NAFTA leads the world in the skill and ambition of our mining and refining engineers as well as that of our technological entrepreneurs. This, however, may be the final decade during which these advantages are so unilaterally strong that we can permanently consolidate an advantage in natural resources and critically the technology metals. The rest of the world is advancing too quickly and our human capital is departing for other industries or geographic localities. Once this human infrastructure has gone the rest of the world will have passed us by, perhaps for good. It will be nearly impossible to rebuild these upstream manufacturing supply chains when the human capital component has so degraded that our universities no longer offer degrees in economic geology or mining engineering, and when an immense amount of the rest of our engineering student community comes from Southeast Asian nations with the expectation of someday returning – especially when those economies are for the first time offering students the hope of lives as affluent or nearly so as they would have enjoyed by staying in the U.S.. The United States needs to craft a coherent minerals and resources policy, or the result will be the slow erosion of our national potential and our ability to lead the rest of the world. NAFTA together has the capacity to become the world’s premier and central supplier of technology materials, their downstream manufacturing industries, and modern technology in perpetuity if our capitalists are supported by an intelligent and coherent government plan implemented before the close of this decade.

In order to at least partially address these resource dependencies, which are in the purest meaning of the term a systemic risk to American national and economic security, this author proposes a reasonable relaxation of regulations on the mining and other extractive industries, for example a speeding-up the permitting process, a liberalization of Department of Energy investment in natural resources and materials sciences, a tightening on foreign investment in domestic natural resources (which never benefits US consumers as well as could be if we were exploiting our own resources), and the imposition of export duties intended to retain for domestic consumption commodities produced in the U.S, natural gas aside. Many nations, especially China, already follow such policy – meaning that, as in so many other areas of U.S.-Chinese relations, there is only a façade of bilaterial fairness in trade. American entrepreneurs cannot invest in Chinese mining operations with anything approaching the freedom that the Chinese can with American operations.

This author would also propose measures encouraging the American business community to diversify their supply streams and sources of raw materials, in order to lessen the chances of any one earthquake or revolution posing a systemic risk to American industry. Taking a second look at the hurdles facing mining companies that wish to operate in the U.S. is especially critical, as this nation is currently dead last in the entire world (albeit tied with New Guinea at about nine years) for how long it takes to get all the mining permits for a new project, and yet our safety and environmental record in mining is only marginally better than that of Australia, in which average permitting time is under two years. There must be room for a more reasonable compromise between the two standards.


[1] (Lifton, 2012)

[2] Dubbed so by Jack Lifton, in the recognition that certain commodities are uniquely low-volume but high-value in the global materials economy for their unusual chemical properties that make modern technology possible, as in the case of the rare earth metals. Technology metals are specialty metals like REEs, graphite, lithium, electrolytic manganese, platinum, cesium, beryllium et al. that possess unusually critical properties in modern technology. These are very high-profit commodities to be involved in nowadays – ones that NAFTA is highly enriched in relative to structural commodities or precious metals.

[3] (European Commision for Enterprise and Industry, 2010)

[4] (Lifton, 2012)

[5] (United States Geological Survey, 2011)