rare earths vs natural gas

April 2, 2012, 12:01 a.m. EDT

What rare earths and natural gas have in common

Commentary: Leaders tangle with sanctions and quotas

By Brigham McCown

DALLAS (MarketWatch) — The U.S. joined forces with the European Union and Japan this month to lodge a World Trade Organization complaint against China over the nation’s export quotas on refined minerals known as rare earth elements.

It’s the right move. These precious metals — a key input for everything from iPhones to hybrid cars — are predominately found in China, where cheap labor and a variety of other factors have allowed domestic producers to corner the market by undercutting competitors over the last several decades.

The results have been dramatic, and now China has effectively dominated almost 95% of the market. By instituting an export quota, Beijing’s move alters the equilibrium of world pricing of this coveted commodity in its favor.

Brigham McCown is a principal and managing director at United Transportation Advisors LLC. He served as the first Acting Administrator of the U.S. Pipeline and Hazardous Materials Safety Administration (PHMSA) under Transportation Secretary Norman Mineta.

A classic move by nation-states aimed at macroeconomic protectionism, these non-tariff barriers to trade not only alter the equilibrium of traditional supply-and-demand pricing models but are ultimately harmful to the global economy. Moreover, such artificial intrusion by a nation-state runs counter to traditional free trade principles expected from any nation. This is especially true in countries like China which have benefited immensely from the most favored nation status (MFN) that the U.S. has conveyed upon them since 1980.

These protectionist policies will be difficult to defend before the WTO in Geneva, a fact that President Obama should be keenly aware of as his administration reviews applications for future export of America’s vast natural gas resources.

It’s no secret that the U.S. has come upon a prolific amount of natural gas as a result of remarkable advances in drilling technologies and new surveys. While years ago we were importing a significant amount of natural gas, today we are presented with a shale boom that could flood U.S. markets in the years to come. Meanwhile in Europe, the price of a British thermal unit (Btu) of natural gas is more than double what it is here.

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Understandably, domestic energy producers are eager to move excess products abroad to meet demand in markets where prices are higher. This dynamic would go a long way towards President Obama’s goal of doubling U.S. exports, but it would also encourage more domestic production and bring considerable wealth and investment to our nation. Energy Secretary Steven Chu even conceded that allowing exports “does create American jobs, and if prices are kept moderate it does bring money to the United States.” But right now, companies are severely limited in their ability to export excess inventories.

In order to transport natural gas across the ocean, products must be super-cooled into liquid, and then shipped on special tankers to overseas destinations where it is then converted back to its gaseous state for further distribution via pipeline. In order to complete this process, energy companies must commit substantial time and resources in order to upgrade infrastructure, including the construction of multi-billion dollar plants to liquefy the gas at ports across the country. But in order to build these plants, federal permits are required.

Secretary Chu quickly approved initial permits for a single $5 billion plant for Cheniere Energy last year, but at least six other permits are in bureaucratic purgatory while the administration addresses inner-party squabbling with Democrats advocating a moratorium on exports. Opponents to free trade are concerned that exports will increase historically low U.S. natural gas prices.

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There is no doubt that the country should benefit from low prices from its domestic resources, yet aside from running counter to our own obligations under the WTO, what these individuals fail to realize is that any minor increases would be more than offset by increased production. Increased production means more jobs here at home, and exports of “Made in the U.S.A.” means a stronger U.S. economy as the profits from a rise in exports are returned home. Regardless, these delays have the administration teetering toward protectionist policy, the likes of which even China might object.

With extremely cheap domestic natural gas prices and an abundance of supply, drillers are poised to simply stop producing at current levels as it becomes less economically feasible to do so. This threatens all the progress we have witnessed thus far in the industry, including some of the 622,000 people directly employed by gas producers and the 2.2 million indirectly employed by their operations. Perhaps that’s just an outcome opponents desire?

While the U.S. can’t legally prohibit shipments to Canada and Mexico — countries with which we share free trade agreements and borders for pipeline shipments — delaying approval of new plants allows the government to put in place a de facto moratorium on a huge portion of our export potential. The only hitch, however, is that adopting government policies to intentionally block exports could in fact also violate the spirit of WTO trade rules.

Therefore, it is disingenuous to call for sanctions on China for placing public quotas on a their rare earth resources, while at the same time blocking the export of our own natural gas resources through the back door rejection of administrative permits.

The Chinese are wrong in the case of rare earth elements and should reverse their practices. President Obama shouldn’t follow in their footsteps with U.S. natural gas, a move which not only runs counter to our own obligations, but which threatens our own economic recovery.