The United States is attempting to perform an impressive tightrope walk as the federal government tries to speed up its decarbonization movement while also prioritizing domestic supply and value chains. The Biden Administration’s Inflation Reduction Act has been praised as the single-biggest piece of climate legislature in United States history. At the same time it has been bashed as a protectionist and overly nationalist piece of legislature by European green energy companies that feel that they will no longer be able to fairly compete in U.S. markets. It’s becoming increasingly clear that this isn’t just the era of the clean energy transition, it’s also an era of historical geopolitical shifts, tensions, and renegotiations.
We are currently living through a historical geopolitical shift toward market fragmentation. This move away from free trade toward protectionist policies is a result of the current energy war between Russia and Europe. After the Russian invasion of Ukraine sparked an energy crisis in Europe that reverberated around the world, the danger of globalized supply chains that concentrate power in the hands of authoritarian regimes was thrown into stark relief.
In response, countries are increasingly turning away from long-established fossil fuel supply chains and concentrating their efforts on locally available energy sources, which are largely renewable. There’s just one problem. China currently dominates supply chains for essential clean energy components. Even if energy consumed in Denmark is being produced in Denmark, for example, the photovoltaic cells were almost certainly made in China.
According to the International Energy Agency, “China is the leading global supplier of clean energy technologies today and a net exporter for many of them.” As of this year’s Energy Technology Perspectives report, “China holds at least 60% of the world’s manufacturing capacity for most mass-manufactured technologies (e.g. solar PV, wind systems and batteries), and 40% of electrolyser manufacturing.”
In the current geopolitical climate, this presents a major conundrum. If Russia can turn off the gas taps today in response to criticism of the war in Ukraine, why couldn’t China stop shipments of solar panels tomorrow in response to condemnation of genocidal acts toward the Uyghur muslim minority?
Not only does China dominate clean energy manufacturing capacity, it also dominates the raw materials markets that those production sectors rely on. The biggest of these is lithium, an essential component of both electric vehicle batteries and energy storage technologies, among other green energy technologies. At present, China is on track to control a third of the world’s lithium in the next two years. As the United States and Europe seek to sever their reliance on China, there is now a huge and increasing demand for lithium from other parts of the world.
The United States has made major inroads toward ramping up its own lithium production, with lithium facilities planned in Nevada, North Carolina, and Tennessee. But despite the massive investments being made in domestic lithium production, it won’t be nearly enough to power the country’s decarbonization movement on any meaningful timeline. So where is all of that lithium going to come from
The answer, most likely, is South America. The continent has vast amounts of lithium, and unlike the United States, it already has established manufacturing capacity, expertise, and an experienced industry to support the scaling up and scaling out of lithium production in the near term. The so-called lithium triangle of Argentina, Chile and Bolivia is well-positioned to take a huge amount of the lithium market share away from China.
But things might not be so simple for Washington. For once, South America holds the leverage, and they may not part their bargaining chips easily. Negotiations within a region where the U.S. has a dark history of intervention and exploitation, resulting in no shortage of anti-U.S. sentiment, will surely present its own geopolitical thorniness.
South American leaders are already expressing that they will not be content to simply provide the raw materials for U.S.-based value chains to profit off of. Instead, they will focus on adding value in their own countries and allowing their own economies to enjoy that windfall. Already, there is talk of creating quotas for how much lithium will be exported and how much will be kept for local markets. “Adding value is central for us,” Argentina Mining Undersecretary Fernanda Avila was recently quoted by Bloomberg. “We know the industry today is growing and there’s a lot of pressure and price volatility. But it’s about making the most of this window of opportunity, not just by shipping out lithium carbonate.”
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By Haley Zaremba for Oilprice.com
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