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)

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2 comments on “The implications of American resource dependency

  1. Chad K says:

    Great article Jon. The mainstream misperception of our resource situation is starting. Even more startling is how this derives to poor commodity based stock prices in which are capital intensive. These commodity based companies are then at the mercy of the big financial players who can short the micro cap stocks, and vastly manipulate the ability of funds to flow into the sector. This all translates into a benefit for the entire corporatist system, allowing the public to not engage directly with the true value and utility of these resources and allows the system to continue to devalue our currency with little regard or immediate consequence. Ultimately this is creating a day of reckoning in a sense that the underlying assumptions can only be unrealized for so long.

    • jongn says:

      All true. It’s worth mentioning, regardless, that the bottom-feeders who prey on people in exploration are the scum of the industry, and like all scum, are swept aside in times of turbulence – which are coming rapidly. The more valuable commodity prices get, the less of a role these small players will have, and the more potential profit we can pursue.

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