The New Resource Curse

The world is on the cusp of a new era, one defined by the scramble for critical minerals such as cobalt, lithium, nickel, rare earths, and a dozen others essential to the energy transition, digital infrastructure, and advanced military systems. This shift is poised to unleash unprecedented economic and geopolitical volatility, far surpassing the instability of the oil age. The implications for the United States and the global economy are profound, with the potential to reshape international relations, trade agreements, and national security strategies.

The Big Picture: Key Points

  • Demand for critical minerals like lithium, cobalt, and rare earths is soaring, with prices for heavy rare earths more than tripling since 2020.
  • The International Energy Agency expects demand for lithium to be five times larger by 2040, and the world's need for cobalt and other rare earths to rise sharply.
  • The critical minerals era compounds the pathologies of the oil era with new uncertainties, including technological stranding and overinvestment in assets that can become obsolete almost overnight.
The oil age, which began in the late nineteenth century, was marked by embargoes, oil-price shocks, nationalization waves, and resource wars. However, the emergence of critical minerals presents a fundamentally different and broader set of uncertainties. The demand for these minerals is spurring exploration across the developing world, raising the prospect of a new round of resource curses in countries lacking the institutions to properly manage sudden mineral wealth. Familiar risks from the oil era loom, including elite capture, failed economic diversification, and the so-called Dutch disease. The comparison between the oil era and the critical minerals era has real limits. Petroleum-exporting countries faced formidable challenges, but they operated in a world with functioning multilateral institutions, a dominant reserve currency, and a superpower willing to underwrite the rules of the global economy. The critical minerals era will feature some of the oil era's pathologies, but it will compound them with a set of uncertainties that have no precedent. The oil curse constituted overdependence on an economically and politically distorting revenue stream, but one that was fairly stable. Critical minerals carry a new risk: overinvestment in assets that can be technologically stranded almost overnight. Rabah Arezki, Director of Research at the French National Center for Scientific Research and a Senior Fellow at the Harvard Kennedy School, Frederick van der Ploeg, Professor of Economics at the University of Oxford, and Michael Ross, Professor in the Department of Political Science and the Institute of the Environment and Sustainability at the University of California, Los Angeles, have highlighted the significance of this shift. They note that the first decades of the oil age were volatile, with the industry's initial market being kerosene for lighting, but the rise of Edison's electric bulb in the 1880s nearly rendering oil obsolete before gasoline and the internal combustion engine rescued it. However, once the automobile, the oil-burning warship, and the petrochemical industry took hold in the early twentieth century, oil's end uses—transportation, heating, petrochemicals, power generation—settled into a pattern that was varied, widely distributed, and relatively stable. The rules that governed the production, refining, pricing, and distribution of oil were sometimes disputed, but they were broadly understood. A handful of major U.S. and European companies controlled the industry; this oligopoly operated largely by way of private commercial arrangements and concessions negotiated with producing states (which often had limited bargaining leverage). In contrast, the critical minerals era is characterized by a high degree of uncertainty and unpredictability. The demand for critical minerals is driven by the energy transition, digital infrastructure, and advanced military systems, which are rapidly evolving and subject to technological disruptions. The supply chain for critical minerals is complex and fragmented, with multiple players and stakeholders involved. The geopolitical implications of the critical minerals era are far-reaching, with the potential to reshape international relations, trade agreements, and national security strategies.

FAQ

What are critical minerals, and why are they important? Critical minerals are a group of minerals that are essential to the energy transition, digital infrastructure, and advanced military systems. They include cobalt, lithium, nickel, rare earths, and a dozen others. These minerals are critical to the development of new technologies, including electric vehicles, renewable energy systems, and advanced military equipment. How will the critical minerals era affect the global economy? The critical minerals era is poised to unleash unprecedented economic and geopolitical volatility, far surpassing the instability of the oil age. The implications for the global economy are profound, with the potential to reshape international relations, trade agreements, and national security strategies. What are the risks associated with the critical minerals era? The critical minerals era compounds the pathologies of the oil era with new uncertainties, including technological stranding and overinvestment in assets that can become obsolete almost overnight. The demand for critical minerals is spurring exploration across the developing world, raising the prospect of a new round of resource curses in countries lacking the institutions to properly manage sudden mineral wealth.

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For more information on the impact of critical minerals on the global economy, visit our Artificial Intelligence page, which explores the role of AI in driving innovation and growth in the critical minerals sector.