IEEJ: January 2011
Special Bulletin
October 27, 2010
A Japanese Perspective on the International Energy Landscape (16)Rare Earth Problem as Seen from Lessons of Energy Embargo
Ken Koyama, PhD
Director
Strategy and Industry Research Unit
Institute of Energy Economics, Japan

China’s rare earth export restrictions have expanded their global impacts. An allegationthat China has restricted rare earth exports to Japan in protest to Japan’s handling of the Senkaku
Islands problem has not only shaken Japan but also attracted global attention. While China’s rareearth exports to Japan have yet to be normalized, media reports state that export restrictions arespreading to cover Europe and the United States.
Various rare earth metals play indispensable roles in hybrid car manufacturing and manyother promising and strategically important industries and technology areas that require advanced
technologies. Under an unbalanced market structure, the world depends on China for over 90% ofrare earth supply. Therefore, China’s rare earth export restrictions naturally have a strategic
importance beyond economic effects not only for Japan but also for the entire world. The Office ofthe U.S. Trade Representative has grown interested in the Chinese rare earth export restrictions andreportedly launched investigations into the export curbs (Nikkei Shimbun, October 22).
China has reportedly explained that the export restrictions have been motivated not bypolitical intentions but by the need for the conservation of resources and the environment. The
explanation may have to be carefully considered, but Japan, Europe and the United States seemed tohave never been satisfied with such explanation. Regrettably, I do not have sufficient knowledge
about rare earths themselves. Therefore, I would like to provide a viewpoint for analyzing the rareearth problem by reviewing energy export restrictions or embargoes that have shaken the world.
As a matter of fact, the world’s most influential energy export curb in history was the 1973
Arab oil embargo. In response to the fourth Middle East War’s outbreak, Arab oil exporting countries
invoked the oil embargo in a bid to influence the Middle East policies of major industrial nations
dependent on oil imports. They divided oil importing countries into three groups – (1) friendlycountries (left outside the oil embargo), (2) hostile countries (subject to the total embargo) and (3)neutral countries (subject to gradual supply reductions), imposing the oil embargo while inserting awedge between industrial nations to obstruct their cooperation. Japan and other industrial nations did
not have sufficient oil reserves then and succumbed to the pressures of Arab oil exporters, accepting
political compromise in order to secure vitally important oil supply. For example, then Chief Cabinet
Secretary Susumu Nikaido issued a statement on November 22, 1973, offering to revise Japan’s
Middle East policy in favor of Arabs. Under the influences of the Middle East War and oil embargo,and fears of a tightening oil supply/demand balance, oil exporting countries raised crude oil prices
substantially. Their power began to peak then.

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In this way, the Arab oil embargo indicated that a country could effectively utilize key
resources as a diplomatic card. But we must pay attention to the fact that the use of importantresources for an embargo prompted countries subject to the embargo (or countries that took theembargo risk seriously) to take countermeasures. Oil price spikes in the 1970s encouraged industrial
countries to introduce alternative energy sources. The spikes became a clue to bring about growth ofnatural gas, nuclear energy and renewable energies to date. A race to develop oil outside Arabcountries and the Middle East spread throughout the world, leading to the expansion of non-OPEC
oil output symbolized by North Sea and Alaska oil development. Furthermore, industrial nations
recognized the significance of oil reserves and enhanced their emergency response capacity toimprove their relevant systems. They also recognized the importance of a framework for theirinternational cooperation in responding to and countering oil producers’ export embargo or oil
supply interruption. They then created the International Energy Agency.
Effects of these countermeasures dramatically changed supply/demand conditions in theinternational oil market. The oil supply/demand balance began to ease in the first half of the 1980s,
leading to crude oil price plunges in 1986. Demand for Middle East or OPEC crude oil declined
sharply, forcing OPEC’s oil market share to plunge from more than 50% in the 1970s to less than
30% temporarily. The market share decline was coupled with the price plunge to seriously affect oil
producing economies. Therefore, we may conclude that an embargo, though producing some effects
over a short time, could invite countermeasures to be taken to reduce its effects over a long time andeventually bring about negative effects to embargo implementers.
But we must take note of the possibility that an embargo or its threat can continue to serveas an effective diplomatic card for a short term that could be at least one year or two rather thanseveral days or months. This is because most of the above-noted countermeasures characteristicallybegin to produce effects after some time lapse. This means that quicker countermeasures areimportant for resolving problems.
Based on the Arab oil embargo and oil consuming countries’ countermeasures, factors that
determine the effects of restrictions or embargoes on supply of key resources are cited below:(1) Global supply/demand conditions for embargoed resources (a tight or soft supply/demandbalance)(2) Fungibility of international markets for embargoed resources/goods(3) Presence/absence or availability of alternatives to embargoed resources/goods(4) Strength of embargo implementers’ wills (unity of a group for a group embargo)(5) Strength of collaboration/cooperation between embargo targets for an embargo on multiple
countries
Once an embargo or a political supply cut is (or is alleged to have been) taken as a
powerful action, the embargo implementer itself may be considered as a clear and present serious
threat. This phenomenon actually happened upon the Arab oil embargo case and Russia’s suspensionof gas supply to Ukraine and Europe in early 2009. Such threat can become a driver ofcountermeasures.
The rare earth supply reduction by China could prompt mainly Japan, the United Statesand Europe to pursue efforts involving the above first, second, third and fifth factors. The problem isthat countermeasures are costly and may take some time before producing effects. However,2

IEEJ: January 2011
policymakers may feel that countermeasures should be taken urgently if they are required for
economic security. The key countermeasure may be to secure the diversity and flexibility of supply.
I now remember a deeply implicative statement in a 1913 parliamentary speech byWinston Churchill, then first lord of the Admiralty (later prime minister) in Britain. “Safety andcertainty in oil lie in variety and variety alone.”

Contact: report@tky.ieej.or.jp

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