Saturday, June 25, 2005

CNOOC's Unocal Bid

On 23 June, China's state-owned China National Offshore Oil Corporation (CNOOC) made an unsolicited $18.5 billion cash bid for the American oil firm Unocal. If Unocal shareholders (and regulators) accept the offer from CNOOC, and not the bid from Chevron valued about 10% less (which is reportedly still under consideration even after the larger bid was made), this would be the largest ever overseas acquisition by a Chinese firm. This may, however, all turn out to be a non-issue:
'Given the regulatory hurdles and longer approval time, the 9% premium may not be enough incentive for Unocal to terminate the Chevron agreement,' Bruce Edwards, analyst at AG Edwards, said in a research note - adding he was confident Chevron would win out in the takeover tussle. [from the BBC]

This acquisition attempt has quite a few people riled up. This attempted purchase is the intersection of a few different sensitive issues in American politics, notably oil security and the rise of China. On the petroleum side, the price of oil recently reached $60 a barrel. In light of oil prices and an obvious mistrust of China, Gal Luft, the executive director of Institute for the Analysis of Global Security, has called a CNOOC acquisition of Unocal "suicidal," explaining:
It's not the government of Japan or France... We want to think about the fact that an American company falls in the hands of the Communist government of China.

Others are worried about it as yet another sign of China's economic rise. The concern and resentment from Americans over China's rise is identical to America's feelings toward Japan's rise two decades earlier. An implicit accusation of not playing fair is never far behind.
Mainland China's top companies are becoming increasingly ambitious and aggressive in their pursuit of foreign assets, their competitiveness boosted by ready access to (effectively free) state cash. [from The Economist; for more on accusations of government support, see here]

Its not just pundits and talking heads that are concerned:

A letter to Treasury Secretary John Snow was circulating in Congress on Thursday calling on the Bush administration to investigate the national security implications of the proposed deal. It was signed by Reps. William J. Jefferson, D-La.; Al Green, D-Texas; Bobby Jindal, R-La.; and Kevin Brady, R-Texas. [from the Washington Post]

The WaPo article continues, quoting C. Richard D'Amato, chairman of the U.S.-China Economic and Security Review Commission:
It's not a business transaction at all... This is not a free market deal. This is the Chinese government acquiring energy resources. This is not a free market deal. This is the Chinese government acquiring energy resources.

This protectionist panic, however, is entirely unnecessary. The underlying concern for energy security is that China, who many American policymakers view as less than friendly, might try to deny America access to the oil the United States needs to keep its economy running. This is absurd. To quote a three year old article from the Christian Science Monitor about why an Arab embargo wouldn't work (keep in mind that the Arab nations control a vastly greater segment of the world's oil reserves than China could ever imagine):
As a general rule, embargoes won't work, energy analysts say, because there is basically one world market for oil, the New York Mercantile Exchange. That means countries that cut back on their shipments of crude to the United States can still end up having their oil arrive in US ports."Oil is fungible," says Adam Sieminski of Deutsche Banc Alex. Brown in Baltimore. "Once it is produced and loaded on a tanker, the buyers can change its port of call."

That oil is a fungible commodity is a very simple concept, but a very important one often overlooked. Therefore, unless you are a neo-Malthusian, there is no cause for concern. If you are a neo-Malthusian, read this CATO report (PDF) and join the rest of us in not worrying.

  • China Matters has a good post on this subject, which includes this quote from the LA Times:
    Not long ago, China was a net exporter of oil, but its growing need for imported oil is one reason crude is trading at $60 a barrel. As the nation emerges from poverty into the global middle class, it is natural that China's consumption of global resources starts mirroring its one-fifth share of global population. For well over half a century, ensuring sufficient reserves and a steady flow of oil has been a cornerstone of U.S. foreign policy. China now has to think in similar ways. Rather than leading to a zero-sum showdown, this affinity of interests between the two nations, if handled properly, could strengthen the relationship

  • Cranky Neocon humorously and pictographically represents the balance of trade between the US and China.

  • Respected economist (and not so respected political columnist) Paul Krugman addresses the CNOOC bid.

  • The House voted 398-15 for
    a resolution stating that Chinese ownership of Unocal would 'threaten to impair the national security of the United States' and that approval by Unocal's board of the bid should result in a 'thorough review' by President George W. Bush.