The effects of a shock to critical minerals prices on the world oil price and inflation

Critical minerals (CMs) such as lithium, cobalt, nickel, and rare earth metals, are essential to the development of clean energy technologies, electronics, and defense and space industries, among others. Demand for these minerals is expected to grow quickly as energy transitions accelerate. As the post-pandemic economic recovery demonstrated, disturbances in CM supplies can also create serious bottlenecks in global supply-chains. In this study, we develop a GVAR model that can examine the consequences of market disturbances from CM price shocks on major global and country-specific macroeconomic indicators. Counterfactual simulations of a CM price shock suggest that that CMs, as a rising industry, are starting to have an impact on the macro level. The industry and its impacts are not fully developed yet but appear to have diverse implications across countries similar in some respects to the current major commodity – oil. A CM price shock has statistically significant implications for inflation in the UK and South Korea. At the same time, geopolitical shocks to crude oil prices have significant implications for CM prices. The cross-price elasticity of oil with respect to CM prices is positive in the United States, where CM's and oil are substitutes, and negative for Saudi Arabia where CMs and oil are compliments. These scenarios indicate the unsuitability of a one size fits all energy policy and a need for closer examination of the national and country specific relationships between the oil and CM sectors.