14 July 2005

The New China Syndrome: Chinocal?

The recent move by the majority state-owned Chinese oil company CNOOC Ltd. is stirring up a lot of controversy; curiously, none of it aimed at the potential environmental concerns of its offer to buy Unocal.

To recap: CNOOC has offered Unocal shareholders $67 a share for a total $18.5 billion. While this bid exceeds rival Chevron’s offer by almost $2 billion, some usually free-market thinking congressional delegates have criticized the bid, questioning it on grounds of national security.

According to James K. Glassman, a fellow at the American Enterprise Institute, Rep. Joe Barton of Texas, chairman of the Energy and Commerce Committee and co-sponsor of a resolution asking President Bush to review the deal, called CNOOC "a ‘front company for the Chinese communist government.’"

This isn’t very likely, as Glassman acknowledges, "71 percent of the company is owned by China National Offshore Oil Corp., which is controlled by the Chinese government. But it's also true that CNOOC, Ltd. is capitalist enough to list its stock on the New York Stock Exchange as American Depositary Shares."

UPI Energy Watch reports that CNOOC Chairman and CEO Fu Chengyu called this bid "purely a commercial transaction," in a conference call with reporters. "We are confident that the U.S. government will support this project." Rival bidder Chevron warns that China will have the power to raise energy prices for U.S. consumers if CNOOC prevails.

China's acquisition of Unocal could lead to more exploration, in Glassman’s opinion, "especially in the Gulf of Mexico and off Indonesia." This could reduce the price of gas at the home pumps, but it may also increase some environmental concerns. Of perhaps greater long-term environmental concern is China’s insatiable and growing thirst for oil.

"There is no question China suffers from major energy-related environmental problems. According to a report by the World Health Organization (WHO), seven of the world's ten most polluted cities are in China," as an Energy Information Administration (EIA) Country Analysis Brief cited a few years ago. "China also is important to any effort to curb emissions of greenhouse gases, as it is projected to experience the largest absolute growth in carbon dioxide emissions between now and the year 2020."

So what’s driving the bid? According to the EIA brief, "China’s leadership has become deeply concerned about its long-term rising dependence on imported oil and natural gas and the risk that future supply disruptions could undermine economic growth, job creation, and social stability."

"This growing sense of energy insecurity is undermining China’s traditional preference for self-sufficiency and state action," the analysis goes on to say. "Limited success in developing domestic resources is driving them to try to secure supplies internationally through equity stakes, sponsoring regional pipeline projects to diversify supply sources, and 'oil diplomacy'."

Whatever the driver, the American people need not be concerned that a foreign company will control a minor player in the oil business, especially one with one a toe on American soil. In fact, it seems like China is playing our game (or calling our bluff). This is the kind of move we usually applaud when it goes in the other direction.

We have been promoting the elimination of protectionist policies in other countries to encourage foreign investment, often making it easier for US companies to invest in foreign entities. As the New York Times reports, "China is already home to growing number of American-owned factories, many of them exporting to US, and large number of factories that are suppliers to American companies."

The greater risk is China’s investments in US government bonds, which are financing our huge deficits. China acquired over $200 billion in U.S. Treasury securities last year, securing its position as one of this country’s major creditors.

We need China and pissing it off by blocking CNOOC’s bid for Unocal is not a wise move.

As James Surowiecki writes in a recent issue of The New Yorker, "Over the last three decades, as China has become more and more integrated into the global economy, it and the United States have become ever more dependent on each other. At this point, if one economy implodes, so will the other. China may ultimately turn out to be more competitor than partner, but for now interdependence is a lot better than open hostility."

There’s that word again, interdependence.

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