The Coming Green-Energy Inflation

"If you think inflation is bad, wait until the rest of the commodity markets really heat up. Although prices for basic materials like copper, aluminum, nickel and steel -- used to build everything -- have already inflated, they haven't yet escalated as much as fuels and energy-driven commodities like food. But they will if European and U.S. policy makers have their way. Buckle up.

On both sides of the Atlantic, leaders promise that more green energy -- solar, wind and electric vehicles -- will cure Western overreliance on volatile oil and natural gas and further isolate Russia. But that cure would be far worse than the disease because green energy's staggering use of basic minerals will fuel inflation.

Just as inflated prices for oil and natural gas rip through the economy, so do the costs of basic minerals, which are needed to build every class of product from appliances and houses to computers and cars. And while materials have for most of recent history constituted a minor share of the final cost of products, that share becomes major if mineral prices balloon.

Producing energy from wind and solar machines, and especially from batteries, requires an enormous increase in supplies of copper, nickel, aluminum, graphite, lithium and other minerals. Each electric vehicle contains about 400 pounds more aluminum and about 150 pounds more copper than a conventional car. That's really going to add up at the proposed levels of production. The same goes for the suite of minerals necessary to build the tens of thousands of wind turbines and millions of solar modules needed for green plans. Unfortunately, as the International Energy Agency and others have pointed out, supply of critical minerals isn't expanding apace. Not even close. That's an incendiary formula for inflation.

To wit: In Paris on March 24, the IEA convened a summit of member nations to strategize on replacing Russian oil and gas supplies while also reaffirming "decarbonization" goals. Attendees issued a declaration to "accelerate" as a "top priority" the green-energy transition to replace hydrocarbons. President Biden and the president of the European Union both reinforced the theme of a green-energy "double down."

On the face of it, that seems logical. Huge increases in the use of solar and wind power, and electric vehicles, could displace enough fossil-fuel use to bring down prices of natural gas and oil. Or it could insulate markets from inflation triggered by the loss of, or sanctions against, of Russian supplies. Energy Secretary Jennifer Granholm said as much when opening that Paris summit.

Whether realistic or not, the mere pursuit of such a strategy is inflationary. And it would last longer than food or fuel inflation. International Monetary Fund economists last year looked at mineral commodity data going back to 1879. They calculated the inflationary impact from trying to meet mineral demands to build enough machinery for a green double-down. Metal prices would reach historical peaks, they wrote, "for an unprecedented, sustained period of roughly a decade." The IMF also pointed out that the "integrated assessment models" for the energy transition "do not include the ... potential rise in costs."

Epic escalation in the costs of minerals would create powerful headwinds for the Federal Reserve's efforts to tame inflation. Evidence supporting the IMF's warning is already at hand.

Lithium -- now well-known because of car and grid batteries -- has seen prices soar nearly 1,000% in the past two years. Prices of copper and nickel, more widely used, are up 200% and 300% respectively over the same period. Aluminum, the second-most-used metal on earth after iron ore, is up 200% and trading at a 30-year high.

While metals historically have constituted a minor share of the fabrication cost of most products, the picture changes with stratospheric input prices. A doubling of aluminum prices would add input costs that wipe out nearly the entire profit margin for U.S. manufacturers of heavy vehicles, according to a 2020 United States Geological Survey paper. Higher prices for cars and trucks are inevitable.

Commodity materials inflation has already ended the long-run decrease in battery, solar-module and wind-turbine costs. That's because minerals alone constitute over half the cost of fabricating batteries and solar modules, and about 20% for wind turbines. Well before the latest mineral escalations, forecasters saw cost rises in 2022 of 5% for batteries, 10% for wind machines and 25% for solar modules. The biggest Chinese and U.S. electric-vehicle makers, BYD and Tesla, recently announced price increases.

The potential for greater inflationary pressure should be obvious. Despite fast growth, the world still gets only 3% of its energy from wind and solar. Less than 1% of all cars on global roads are battery-electric. ING determined in late 2021 that a double-down on electric-vehicle goals would alone soak up about half of all current aluminum and copper production and about 80% of global nickel output.

Polls show that consumers believe increasing oil and natural-gas production reduces inflation. We've seen genuflections to that reality on both sides of the Atlantic: Europeans petitioning for more fuel from Algeria and Qatar, and the Biden administration releasing oil from the Strategic Petroleum Reserve. But no one in Europe or the U.S. is talking about a surge in mining capacity, nor is a Strategic Energy Minerals Reserve even possible.

Mining is like anything else. Eventually high prices stimulate more production. But the slow real-world expansion capabilities of mining explains the IMF's forecast that mineral inflation would last "roughly a decade" until supply catches up.

Most analysts focus on where the gigatons of new minerals will come from, and the derivative geopolitical impacts of the new supply chains. It would shift Europe's dominant dependency from Russia to China; for America, from domestic industries to China. But policy makers are going to be hit first by the fast and furious inflationary effects of chasing minerals.

Policy makers do have a tool they're familiar with to conquer more minerals inflation: Use President Obama's famous "I have a pen and a phone" logic to repeal green mandates that inflate demand. As Ms. Granholm told the IEA summit, the "decisions we make today ... will shape the energy landscape of tomorrow."

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Mr. Mills is a senior fellow at the Manhattan Institute, a partner in Montrose Lane, an energy-tech venture fund, and author of "The Cloud Revolution: How the Convergence of New Technologies Will Unleash the Next Economic Boom and a Roaring 2020s." [1]

1. The Coming Green-Energy Inflation
Mills, Mark P.
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 18 Apr 2022: A.19.