Sucker Punch

Amid the dispiriting news of droughts in Pakistan and the Western US, Greece’s stranded economy, three almost simultaneous terrorist attacks, escaped convicts and shark bites, two stories caught my eye:

Molycorp — sole U.S. rare earth producer — files for bankruptcy

Molycorp Inc. — the only U.S. producer of rare earth elements used in high-tech communications, transportation and industrial products — filed for Chapter 11 bankruptcy protection amid competition from China and waning demand.

A North Dakota Oil Boom Goes Bust

In a field of brittle yellow grass and clotted mud about five miles north of Dickinson, North Dakota, stands a cemetery of sorts. Drilling rigs stretch into the sky like tall skeletons. … Similar graveyards have been popping up across the western half of the state since the price of oil sharply declined last fall. …

In both cases we see business models that were predicated on artificially high prices overseas: rare earths from China and oil from OPEC. In response to China’s limiting the export of rare earths, investors revived an old rare earth mine in Colorado. In response to a long run of high prices set by OPEC, US oil companies expected that tight oil from shale formations in North Dakota and Texas would eventually turn a profit.

Then both China and OPEC changed the rules. The Middle Kingdom suddenly relaxed restrictions on exporting rare earths, and the Kingdom of Saudi Arabia led OPEC to decide against holding up high prices. Investors failed to consider the influence that a swing producer has over the market.


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