The about-to-be-toppled Egyptian regime has sparked fears of upheaval sweeping through the remaining U.S. friendly regimes in the world’s oil heartland.

Nowhere is the growing uncertainty more apparent than in the oil markets. Today, oil prices continue to their fear-driven surge. A barrel of Brent crude passed $100 for the first time over two years.

Oil and energy stocks mostly followed suit and led the major indices to another day of gains.

The surge in oil prices didn’t bring all energy-related stocks along with it though. The divergence shows how truly weak one of the hottest sectors in the world has grown over the last few weeks and confirms this micro-bubble is likely about to burst.

Best of all, as this bubble burst though, a real opportunity is filling its void that almost no one is even talking about yet.

Rear Earth Elements: A Bubble Too Far

The rare earths sector was one of last year’s top performers.

The elements, used in small amounts in electronics were widely expected to be propelled higher by their increased use in batteries, electric cars, and

The rare earth theory was very similar to the same one that is consistently driving agriculture prices higher. Riding food demand and improving diets were going to push agriculture prices mildly higher. But when the diversion of a large percentage of ag commodities was diverted to biofuels was mandated, demand far outstripped supplies and prices surged.

The rare earths story was expected to be very similar. Growing demand from electronics was enough to keep supplies of the critical elements tight. However, increased use in hybrid and electric vehicles, windmills, and other new green energy sectors was going to push demand much higher, much faster.

In addition to that, the rare earths story has an oft-cited supply/demand situation in which even small increases in demand can send prices significantly higher.

On the supply side, China controls more than 95% of global production. As the storyline goes, China can/will/is using them as weapons of economic warfare.

On the demand side, rare earth consumption has grown from 30,000 tonnes in 1990 to 120,000 tonnes last year and is expected to hit 200,000 tonners per year in 2014.

The market has been expecting a supply crunch and a surge in rare earth prices beyond their already lofty highs. And since they’re essential and used in such small amounts in batteries, electronics, and green energy technologies, the market expected prices to reach the stratospheric levels and there to be little consequences on the end consumer of price increases.

Then a few weeks ago the rare earth bubble was pushed a bit too far when market dominating rare earth producer China announced it would cut its export quota.

Rare earth stocks quickly soared. Molycorp (NYSE:MCP), the leading rare earth stock, saw its shares surge from an IPO price of $13 to a recent high of more than $60 per share.

Also, Rare Element Resources (AMEX:REE), one of the darlings of the rare earth boom, jumped from $10 per share to more than $17 in a few days after the announcement capping off a bubbly two-year run:

This type of parabolic run-up and surge in volume is indicative of bubble tops.

Historically, the top of every bubble has been marked by a massive, parabolic surge in prices. The NASDAQ rose from 1500 to more than 5,000 between October 1998 and March 2000. That was an 18 month increase of 233%.

The gold bubble of the 1970s ended in a final parabolic surge of 99.74% in average prices before it imploded.

The latest 50% to 70% across-board-surge in rare earth stocks is right in line with past euphoric tops.

Perhaps more importantly, the surge has pushed rare earth stock valuations far beyond any reasonable measure.

Consider this. The annual market for rare earths is less than $1.4 billion, yet the market value of the industry is more than $8 billion:

Something has got to give…and it’s looking like the floor on rare earths is about to give out.

The Bad News

This kind of run rare earth stocks have been on has inevitably led to great expectations for their future. And we know great expectations lead to great disappointments.

The solution to high prices has been high prices for centuries. Rare earths, although a good story, are proving they will not likely be any different.

Further deflating the rare earth bubble has been Toyota’s recent actions. The world’s largest maker of hybrid vehicles recently revealed it has been researching a new motor for its hybrid cars which does not use any rare earths. Toyota added the motor will be lighter and more efficient too.

All of this has the top rare earth stocks giving back 20% to 30% across the board in the last few weeks as reality sets in.

Further deflation of the bubble has only been made more likely due to recent market action. Given that the primary driver of the rare earth bubble has come from anticipated increases in demand from hybrid and electric cars which in turn would benefit from higher oil prices, rare earth stocks should go up with a big run in oil prices. They, however, have continued to decline even though oil prices rose. Simply put, it’s a very bad omen for rare earths.

And the Good News

At this point, the risks clearly far outweigh the rewards in the rare earth story. But there is an upside to all this.

The rare earth bubble has masked a very real boom underway in proven energy efficiency technology. It has been overlooked for years. But due in part to higher oil prices, it won’t be overlooked for much longer.