Rare Earths Not So Rare?

• The bankruptcy of the main US producer of "rare earth" materials signals the end of a multi-year crisis over their global supply and cost.

The announced Chapter 11 filing of US-based rare earths mining and refining company Molycorp effectively marks the end of a crisis that managed to escape the notice of most people. Rare earths are elements of low abundance, compared to the ores of metals like iron and copper. Despite their relative scarcity, they have proved extremely useful in industrial applications including renewable energy technologies. Five years ago it appeared that China had cornered the market on rare earths and was exercising its market power to, among other aims, lure businesses reliant on these minerals to shift their operations to China.

Molycorp's modernization of its rare earth mine in California and subsequent expansion into other aspects of the business were responses to a perceived global crisis. China's restrictions on rare earth exports threatened the economic competitiveness of hybrid and electric cars, wind turbines, non-silicon solar cells, compact fluorescent lighting (CFL), and other devices of interest to energy markets and policy makers.

The situation also raised concerns in the defense industry, due to the importance of rare earth metals and alloys in the manufacture of missile components, radar and sonar equipment, and other military hardware. Governments created or expanded strategic stockpiles for these materials, and took other steps to manage their reliance on supplies from China.

However, as reported by the Council on Foreign Relations last fall, the effectiveness of efforts by the Chinese government to leverage their control of rare earth supplies was short-lived. Its policies led to mostly market-based responses, involving both supply and demand, that undermined China's near-monopoly and ultimately contributed to Molycorp's present financial difficulties.

Molycorp wasn't the only company to bring new supplies into production, or the only one to struggle as the crisis unwound. New supplies were already in the pipeline at the time China restricted its exports, in reaction to price spikes that preceded the policy as global demand bumped up against the output of China's mines and processing facilities. Nor was government control of China's fragmented rare earth industry sufficient to prevent continued exports exploiting loopholes of the restrictions.

Finally, and probably most importantly for both China-based and non-China-based producers, innovators in the industries using these materials found ways to make do with lower proportions of rare earths in permanent magnet motors and generators, or to do without them altogether.

The upshot from an energy perspective is that if anything will slow the expansion of wind and solar power, hybrid cars and EVs, and other alternative energy and energy-saving technologies, it is unlikely to be a shortage of rare earths. They may be rare relative to other industrial commodities, but in the small proportions used it seems they are not rare enough to pose more than a temporary bottleneck.

Where Is the Stimulus from Cheap Oil?

• Those expecting a boost to the US economy from lower oil prices--the opposite effect of past oil price spikes--have been disappointed by the anemic response so far.
• In GDP terms cheaper net oil imports have been offset by cuts in oil & gas investment. However, consumers now have billions saved at the gas pump to spend elsewhere.

For the last couple of months media coverage has reflected skepticism about the benefits of lower oil prices, and especially cheaper gasoline, for the US economy. This is somewhat puzzling, since the US is still a net importer of crude oil, and as such has enjoyed significant savings on our collective oil import bill during this period. And while the fallout for US oil producers whose rising output helped to trigger last fall's oil price collapse might negate some of the upside of that decline for the nation as a whole, the benefits for consumers ought to be more obvious.  

 

Start with some basic figures. From January to September of last year, West Texas Intermediate crude oil, the main benchmark for US petroleum, averaged $100 per barrel (bbl), in line with the average of the previous three years. From October through mid-May of this year, WTI has averaged just over $60/bbl, near where it trades today. The data for what US refineries paid to acquire imported oil through April reflect a similar drop, implying national savings of around $60 billion since the price of oil fell below the previous year's lows last October, on the basis of 7 million bbl/day of net crude oil imports. That equates to $94 billion on an annualized basis.

 

However, as I've noted before, the US has become a significant net exporter of refined petroleum products like gasoline and diesel fuel. If the revenue from those sales has fallen in parallel with oil prices, that would shrink the benefit for overall US petroleum trade by about a third.

 

At that level, the GDP gains from cheaper imported oil appear to be more than offset by cuts of over $90 billion in capital expenses as US oil producers seek to reduce their costs and manage their cash flow in a low-price environment.  Those cuts, along with reduced operating expenses, ripple through oil companies and their supply chains, resulting in job losses and suppliers that have less, in turn, to invest in new equipment.  

 

Of course the flip side of that is that with US net petroleum imports below 5 million bbl/day, out of total consumption of just over 19 million bbl/day, the country would suffer much less than previously from a sudden increase in oil prices due to some geopolitical event or a further change in OPEC's strategy.

 

Nor does this alter the fact that US consumers whose jobs are not tied to the oil industry have more left to spend or save every month, thanks to lower prices at the gas pump. Since the beginning of last October, US retail gasoline prices have averaged $0.84 per gallon less than at the same point a year earlier, peaking at a $1.25 year-on-year discount in mid-April. Current prices for all grades average $0.92/gal. less than in early June of 2014, following the Memorial Day weekend. As a result, consumers have gained around $90 billion in gasoline savings through May, equivalent to $137 billion per year.

 

If they're not yet spending the difference on other goods and services, they have reacted in other ways more directly related to cheaper gasoline: They appear to be driving more. The US Department of Transportation's gauge of vehicle miles traveled is up sharply, at or near a new high. API's oil statistics for the first quarter of 2015 show total US gasoline consumption ahead by 2.9%, compared to the first quarter of 2014. As cold and snowy as the past winter was, that's surprising.  If this trend persists, it could indicate a reversal of the generally downward trend in US gasoline demand since the financial crisis.

 

Consumers also appear to be purchasing larger, somewhat less fuel-efficient new cars. The Transportation Research Institute at the University of Michigan reported that average US new-car fuel economy of new cars sold in April was 0.6 mpg lower than at its peak last August, though still up by 5.1 mpg since October 2007.  Consistent with the figures on fuel economy, sales of hybrid cars fell by 16% in the first quarter, compared to last year, and now make up just over 2% of US new cars. Plug-in hybrids fell by nearly a third. Only battery-electric EVs bucked this trend, driven largely by Tesla's growth in sales.

 

Despite these shifts, I don't believe the return--for however long--of fuel prices that start with a "2" instead of a "3" or "4" will turn the US back into a nation of gas guzzlers. Consumers are only spending a fraction of their savings at the pump buying more fuel, and the preference of many for cars larger than those they were buying when gas prices reached $4 per gallon seasonally in much of the country doesn't alter the fact that even light trucks are becoming steadily more efficient.

 

Wherever the rest of that $100-plus billion a year from cheaper gasoline is going today, Americans would be wise not to assume it will carry into the future indefinitely. Oil prices remain volatile and uncertain. Although OPEC might be correct in projecting that we will not see $100 per barrel again soon, current prices may not prove sustainable, either. 

A different version of this posting was previously published on the website of Pacific Energy Development Corporation.

 

EPA's Blown Call on Ethanol

• EPA's proposed revision to renewable fuel quotas achieves the appearance of compromise by cutting non-existent volumes, while still attempting to force more ethanol into the market than consumers seem to want.

Last Friday the US Environmental Protection Agency released its long-awaited proposal for untangling a broken federal Renewable Fuels Standard (RFS). Although it provides all parties with greater certainty, it fails to resolve the regulation's fundamental flaws. This is all the more disappointing for the duration of the wait involved, finalizing 2014's quotas 18 months late and leaving refiners and fuel blenders to operate for the first five months of this year on hints and guesswork about how much ethanol and biodiesel they would be required to sell in 2015.

The proposal meets at least one definition of a compromise, with most affected constituencies apparently disappointed or irate about the result. To someone unfamiliar with the situation, it might even seem that, as ethanol groups claim, the agency has leaned far in the direction of assuaging the concerns of the petroleum refining industry by cutting a total of 11 billion gallons from the 2014-16 quotas for ethanol and other biofuels. However, as EPA's accompanying analysis makes clear, the omitted volumes were unlikely ever to be purchased by end-users, given the decline in US motor fuels consumption since the statutes imposing the RFS were passed in 2005 and 2007. Nor do the facilities yet exist to produce the quantities of cellulosic biofuels that account for the lion's share of the proposed cuts.

EPA's documentation repeatedly cites the "intent of Congress." This seems to refer to the Congressional sessions that bequeathed us this policy, rather than to the current Congress, which is waking up to the fact that the program has largely been superseded by reality. The RFS was designed to address two problems: US fuel scarcity and transportation-sector emissions of greenhouse gases. The former has been overcome mainly thanks to the shale revolution, transforming the US from a net importer of refined petroleum products to the world's largest exporter.

As for automobile-related emissions, they are being managed more effectively by fuel economy improvements and new vehicle technology. The RFS may even be counterproductive in its overall emissions impacts, as noted in a press release from the Environmental Working Group. Nor are emissions the only issue for which crop-based ethanol may be doing more harm than good. Evidence points to periodic impacts on global food prices. It's hard to conclude we could divert 38% of the US corn crop without causing unintended consequences somewhere.

EPA's analysis of the snarl at the core of the existing RFS is perplexing. First it describes how ethanol has effectively reached its maximum possible penetration of the US market for ordinary gasoline containing up to 10% ethanol (E10)--the so-called "blend wall." It goes on to acknowledge that sales of gasoline blends containing up to 15% or 85% ethanol, respectively, remain minuscule relative to total gasoline sales. However, it then ignores these facts and persists in the hope that by continuing to increase its ethanol quota, albeit more slowly, it can convince consumers to embrace fuels for which they had little appetite even when gasoline cost $1 more per gallon than it does today.

As the Washington Post noted, most car manufacturers still warn automobile owners that using gasoline containing more than 10% ethanol could result in engine damage not covered by their warranties. Although I was pleased to see that the car I recently purchased is warranted up to 15% ethanol, I cannot envision buying a single gallon of E15 unless it was priced at a discount to E10 gasoline, reflecting its inherently lower fuel economy and range. As for E85, in only a handful of states does the market discount meet or exceed the fuel's 27% calculated deficit in delivered energy, compared to E10. Is it any wonder that for a decade E85 has failed to take off as envisioned by the EPA and previous Congresses?

The EPA does not have a free hand to rewrite this regulation in any manner it would like, to fit the greatly altered circumstances in which the US now finds itself. The agency may well believe it has gone as far in that direction as it could, although I suspect it could have justified freezing ethanol from all sources at current levels, and allowing cellulosic ethanol gradually to displace corn-based fuel as new facilities come online. However, no adjustments that EPA seems prepared to make can repair a biofuels policy that was fundamentally broken at its inception, due to its inherent contradictions with other policies and consumer preferences.

We have reached the point at which conflicting federal biofuel quotas, emissions regulations, and  chronically weak GDP growth have rendered the original goals of the RFS not just ambitious but unattainable. The EPA has taken its best shot at addressing this and come up short. It is now up to the US Congress and the Administration to work together to fix this mess, before the consequences of inaction put a damper on one of the few bright spots of the current economy.