Lithium is not oil: A critical minerals perspective on what makes a resilient energy transition

After years in a wilderness of neglect, fears of energy security are back. Policy-makers and geopolitical strategists are worrying, again, about familiar problems – such as Europe’s excessive dependence on natural gas that’s no longer flowing from Russia and flakiness in global oil supplies.

Alongside those worries is a fresh fear: that the transition to a new, clean energy system will create a host of new dependencies and insecurities on the purveyors of critical materials such as lithium, copper, graphite, aluminum, nickel and rare earth minerals.

In going green, the warnings go, the world will trade dependence on insecure supplies of oil and gas for insecure supplies of these other critical materials.

Most of those fears are overblown and are leading to policy responses that could make things worse. Markets, for the most part, are doing a good job in linking supply and demand.

There’s no question that the ‘energy transition’, as the shift to clean energy systems is oddly called, will create a surge in demand for critical materials. A huge number of studies have documented that shift from the big picture to particular materials, like copper, to particular countries, notably China.

Since many of these concerns focus on lithium – a key ingredient in most battery systems used for electric cars to battery-based electricity storage on the grid – I will focus on that.

Global demand in all kinds of specialty products is rising – from bourbon to Barbie dolls – and that does not create need for policy responses. But dependence when energy is concerned keeps busy an industry of experts prone to find threats in the world.

The important question for analysis isn’t whether demand is rising or whether the world needs energy. Rather, it’s whether there is something special about dependence on lithium (and other critical materials) that is cause for concern.

Getting in the way of answering that question is metaphors – in particular, metaphors that equate dependence in energy with dependence on oil. Put bluntly, lithium is not oil.

Policy-makers should not treat the energy transition as merely shifting dependence from one critical supply chain (oil and OPEC) to another (lithium and other critical materials from China).

Supply and demand for the materials that are essential to the energy transition are much different from the oil-dominated energy system; policy instruments can exploit those differences by making it harder to corner the market for critical materials.

On the supply side, one of the striking differences is supply response. For a long time, few strategists much worried about lithium supplies, or the supply of lithium upgraded from its raw form to useful materials – an activity highly concentrated in China. Now they are.

But what’s interesting about lithium is how investors are responding. In 2022 alone there was a one-fifth expansion in global supplies of lithium – essentially all of it outside China.

In other critical materials there are, as well, big expansions of supplies away from today’s dominant market suppliers – such as big new cobalt finds (instead of dependence on slave labour in Congo) and rare earths (in the US, instead of China).

On top of that, there are new technologies for producing lithium that, today, have stronger incentives for proving – such as extracting lithium from brines – which could be an important US supply. In all these areas, policies are helping encourage otherwise marginal supplies, but the raw market signal is powerful as well.

When a new dependence on a material rises suddenly there are all kinds of shocks and hiccups, which then translate into prices. Lithium prices, along with lots of other commodities, soared amid COVID pandemic supply shocks, but they have since moderated.

Users of lithium, suitably shocked, are also finding other ways to lock up supplies such as with longer term contracts whose prices aren’t directly reflected on spot markets.

On the demand side there’s also a lot of encouraging news. Some of it comes from recycling, which lowers the demand for virgin supplies. A lot comes from the stronger incentive to look for alternatives to lithium, such as iron-based batteries that can be used in some applications where lithium, previously, was assumed to be king.

Understanding the demand for raw lithium – and upgraded, processed lithium – is particularly important because here is where lithium is particularly unlike oil.

When oil prices shoot up the global economy’s oil using aircraft, trucks, ships, cars and fertilizer plants don’t have many other alternatives. They must keep cranking, and that means demand isn’t that responsive. Lithium users have many more options, including dragging out (or even cancelling) projects – as many have done.

It's time to take a breath and reconsider the new dependencies on critical materials. While doing that, governments and analysts can sharpen how they think, including about the metaphors that are used.

We need more careful stress tests that look at real responses in supply and demand. Those stress tests must take uncertainty more seriously – including uncertainties that, so far, generally suggest both supply and demand are more responsive than conventionally assumed.

Instead of onshoring supplies – as many governments, especially the US, are doing today – we should be looking more closely at market-oriented “friendshoring”. In practice, that means identifying supplier countries that are willing to play by the rules and open trade, differentially, to all of them.

The concept of a “friend” needs a new, friendlier look – the US should build closer relationships not just with Europe but also Korea and Japan – two countries whose interests are nearly perfectly aligned because they have large lithium needs for their battery industries and similarly concerned about Chinese dominance.

Many other friends are lining up, and an additional advantage of this approach would be to identify places where free trade rules can expand – something that would help give the World Trade Organization new purpose.

Former defence secretary Bob Gates, reflecting on US dependence on China for computer chips and other materials, once implored policy makers to adopt a “small yard, high fence” approach to dependence – identify only the places where dependence is truly problematic. So far, there’s little evidence that lithium is in the yard.