Introduction

This paper examines how critical mineral price shocks affect macroeconomic dynamics and contrasts these with traditional oil price shocks. As economies shift toward electrification and low-carbon energy, critical minerals — such as lithium, cobalt, and rare earth elements — are increasingly important. These minerals are more geographically concentrated than oil, with China controlling up to 80% of certain rare earth elements (p.4). The IEA notes that many critical minerals experienced broad-based price increases in 2021 and early 2022, accompanied by strong volatility, particularly for nickel and lithium (p.4). The IEA predicts that copper demand will rise by 50%, while oil consumption may fall by 25% by 2040 under a net-zero scenario (p.4).

Model

The paper extends a standard neoclassical open-economy growth model. Oil is modelled as a variable input affecting the operational costs of existing capital, while critical minerals are introduced as an essential component of capital formation, influencing the marginal cost of investment and the installation of new capital without affecting existing capital stock. External borrowing is subject to a risk premium that rises with the country’s debt-to-capital ratio.

Long-run effects: closed-form elasticities

Under the model, permanent oil price increases reduce output, capital, oil use, and consumption, with the magnitude determined by factor shares and the elasticity of substitution between inputs. Mineral price increases operate through two channels: a finance-attenuated substitution effect and a wealth/balance-sheet channel. In economies with positive net wealth and a sufficiently high capital-to-oil share ratio, a permanent mineral price increase is less contractionary for output and employment than an oil price increase of the same magnitude, and long-run employment may even rise slightly.

Numerical simulations for transitional dynamics

In the OECD benchmark calibration, an oil price doubling causes output to fall by nearly 2% on impact, declining to a new steady state roughly 2.4% below the initial level (p.16). A mineral price doubling leaves output essentially unchanged on impact and only gradually drifts down to a long-run loss of about 1% (p.16).

The capital stock contracts by about 5% under a mineral shock versus roughly 2.4% under an oil shock (p.16). After an oil shock, employment initially dips below baseline; after a mineral shock, employment rises slightly above baseline and remains slightly higher in the long run (p.16).

These results hold across a range of elasticities of substitution and borrowing-premium parameters. Even when mineral prices are set to match the same steady-state debt level as an oil price doubling, the mineral shock remains less damaging for output and welfare across all calibrations.

Assumptions, interpretation, and policy discussion

The paper notes two simplifying assumptions that make its estimates an upper bound on the macroeconomic impact of mineral price shocks: the mineral input is treated as a single composite with a uniform price increase, and the model abstracts from substitution across materials and technologies in capital formation (p.19).

Mineral price shocks operate primarily through the user cost of capital and the external balance sheet, generating milder recessions in output and welfare than comparable oil shocks. The paper points to macroprudential and fiscal tools — such as countercyclical capital buffers, precautionary wealth buffers, and stabilisation funds — as more natural instruments than demand-stabilisation policies for managing mineral price shocks (p.20). Policies that raise effective substitutability and preserve reliable access to external finance are identified as central to managing both types of shocks.

Conclusion

Oil price shocks remain the more severe threat to aggregate activity and welfare. Mineral price shocks transmit primarily through investment and the external balance sheet, with smaller and more gradual losses in output and welfare. Future research is directed toward extending the analysis to environments with nominal rigidities and commodity-exporting economies.