Publications: Notes at the Margin

The Crowding-Out Effect: Oil E&P Expenditures Displaced by AI Investment/Rare Earth Minerals: China "Scuppers" Bessent

 

Oil markets were generally dull in October. Crude prices declined from September but, except for the Brent rise after the US announced new sanctions on Russia, were stable as refining margins rose. Once again, income is being transferred from producers to refiners.

 

Beneath the surface, though, the industry was being undermined by the growing investments of major technology firms. Their spending, combined with the rising share prices, will likely “crowd out” the oil industry, meaning the major firms—except possibly ExxonMobil—will have to curtail capital spending despite calls for increases.

 

Crowding out is a well-known economic phenomenon. However, this may be the first time large oil companies are forced to limit capital outlays by a more powerful sector. Oil and natural gas prices could rise in the coming years due to the industry’s inability to invest at the rate necessary to maintain or expand production.

 

The first section of this report examines the crowding-out impact.

 

The second returns to rare earth development. We are completing a lengthy report titled “A Primer on China’s Dominance of Rare Earths.” We embarked on this detailed study following the October 13 Notes in which we warned that China could cause an economic disruption similar to the 1973 Arab oil embargo. Our thorough analysis confirms the conclusion.

 

Our findings conflict, however, with the views of US Secretary of the Treasury Scott Bessent, who asserted that China “made a real mistake” when it threatened to restrict its rare earth exports to the United States. Bessent told Financial Times that “the US would secure alternative supplies within two years.”[i]His statement mirrors Richard Nixon’s November 1973 promise to make the US energy-independent by 1980. While the United States achieved its goal, it took 46 years, rather than the expected seven. Our review of the rare earth industry suggests the United States might not wean itself from China as a supplier until 2070 or beyond.

 

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