Oil Cassandras Can Learn From Rare Earths

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 |  Includes: CVX, GM, GRA, OIL, REMX, USO, XOM
by: Carlos X. Alexandre

I’ve lost count on how many times I have heard that we will run out of oil, and based on that fact the commodity will continue rising in price until the cows come home. That is assuming that industry in general will sit on their rears and will just keep dishing out money without resorting to creative thinking. It’s not even about the price, but the availability, and if we run out of oil without a solution, this thing we call Earth will stop functioning.

Furthermore, those in the “oil catastrophe” camp love to feast on misery which is extremely in line with the Armageddon gold loving crowd that is probably building bunkers before the end of the world arrives. I have faith in mankind, and often we forget how far we’ve come in only 100 years. It hasn't been perfect, but certainly beats the hell out of candle light, horse-drawn carriages and incurable diseases.

I was reading a story by Bloomberg titled “Rare Earths Fall as Toyota (NYSE:TM), GE (NYSE:GE) Develop Alternatives,” and as soon as I saw the headline, oil came to mind. Disruptive technologies have a way of displacing old habits while delivering prosperity, and as an example, the automobile rendered the carriage builders obsolete.

“If you think you can keep raising the prices for those materials and still keep your customers, you’re crazy,” Jack Lifton, co-founder of Technology Metals Research, said in a telephone interview. “The principal customer for rare-earth metals is a global automotive industry using rare-earth permanent magnets. That industry will engineer this stuff out.”

The Market Vectors Rare Earth/Strategic Metals ETF (NYSEARCA:REMX) is living testament to the reversal of fortune.

Certainly Exxon (XOM), Chevron (CVX) and the other oil majors understand the oil production landscape, but one thing they also know is that if we run out of oil, they are out of business.

As the article points out, innovation has a way of solving problems, and industry always manages to make fools out of doomsayers. And if an alternative to oil is not here yet, it’s because the economics dictate that it isn't time. After all, necessity is the mother of all invention.

General Motors, the largest U.S. automaker, plans to sell a Chevrolet Malibu Eco next year that uses an induction motor, and otherwise cut down on magnets that use a lot of rare earths.

And yet another example,

W.R. Grace & Co. (NYSE:GRA) this year began selling an oil-refining catalyst with reduced lanthanum, a rare earth that has increased in price more than four-fold in the past year. Lanthanum improves the amount of gasoline refiners can extract from crude oil and is also used in hybrid-car batteries. Half of the company’s customers had switched to the new formula, which offers the same performance and gives them “double-digit type percent decreases in their cost,” Grace Chief Financial Officer Hudson La Force III said on a conference call this month.

Thus, the next time someone delivers some future calamitous prediction for the energy market or the “end-of-whatever,” chances are that he or she is an avid comic book reader, and you should ask the name of the character that is guiding their thoughts. Maybe it’s “Captain Notaclue.”

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.