THE FINANCIAL PAGE
ALL THE OIL IN CHINA?
by James Surowiecki
Copyright The New Yorker – Issue of 2005-07-11 and 18
When the China National Offshore Oil Corporation, or cnooc, made an $18.5-billion bid for the American oil company Unocal two weeks ago, topping a previous offer of $16.5 billion from Chevron, a political storm was inevitable. The Chinese government owns seventy per cent of cnooc (pronounced “see-nook”), and, for many in Washington, China is a natural enemy in the making. Representative Joe Barton said that the deal “poses a clear threat to the energy and national security of the United States.” Representative Richard Pombo prophesied “disastrous consequences.” A host of congressmen argued that the Committee on Foreign Investments—a government body that vets corporate acquisitions by foreign companies with an eye toward national security—should investigate the deal.
Some of this hostility is a matter of simple protectionism. While the U.S. has historically been a leading advocate of free trade, foreign intrusions on American shores are rarely welcomed. The current flap calls to mind the outcry that greeted Sony’s purchase of Columbia Pictures, in 1989—a precious national resource in the hands of the Japanese! But people find the oil deal particularly upsetting because it unites two of the age’s greatest causes for anxiety: oil and China.
People are worried about oil because prices are high, demand (from China, in part) is up, and supply may be dwindling. The assumption is that if China buys natural-gas and oil reserves it gets stronger and America gets weaker. But that’s not actually how the global oil market works. To begin with, Unocal is not “an American energy asset,” as Representative Pombo said last week. The United States does not own or control Unocal and has no claim on the company’s gas and oil reserves, which are dotted across the globe. And Unocal does not reserve its oil for American consumers. Like every other oil company, it sells to the highest bidder. In the end, its responsibility is to its shareholders, not to American national security, as some of Unocal’s recent activities (such as working with the Taliban on a potential pipeline) might indicate.
More important, in today’s world whether or not you own the means of oil production doesn’t affect your access to the stuff. Oil trades in a world market, and every player buys and sells at effectively the same price. The United States, as a nation, does not own any oil companies, but Americans can still buy all the oil they need. (That may change someday, but, if it does, access to oil will be determined by whose army is strongest, not by whose name is on a lease.) Some congressmen have suggested that if cnooc succeeds in its bid it will take Unocal’s oil and send the oil to China alone. Even supposing cnooc did this, it wouldn’t affect American consumers. Unocal provides less than one per cent of the oil consumed in this country. Moreover, if Unocal’s oil went exclusively to China, the Chinese would buy less oil from other producers, freeing up supplies for the American market. None of this would change the price of oil in the slightest.
A devious mind might suggest that, even if it makes no difference who owns Unocal, the deal ought to be blocked just to inconvenience China. But allowing Chinese companies into the American market makes both economic and strategic sense. It makes economic sense because markets work best when assets flow, without the interference of governments, to the people who value them most highly. (Currently, cnooc values Unocal more than Chevron, the other bidder, does.) That’s why the United States has so strenuously persuaded other countries to abandon protectionist policies and open their markets to foreign investment. In the past few years, the Bush Administration has pushed the Russian government to open its energy industry to foreign investment. And the United States has exerted tremendous pressure on China (albeit with limited success) to get it to improve its trading policies and allow foreign companies to run their own businesses free of state intervention. Blocking the Unocal deal would make it a lot harder down the road for the United States to get foreign countries to open up.
Quite apart from the free-market considerations, it’s a good idea for the Unocal deal to proceed. In geopolitical terms, China may be a rival, but in economic terms it’s one of our most important partners. The country is a favorite investment area for American companies, and American consumers reap enormous benefits from the low prices of Chinese goods. Above all, China is one of the world’s biggest buyers of United States government bonds. Our government has been able to finance its huge deficits because of China’s willingness to buy billions of dollars’ worth of American debt. The irony of our worries about Unocal is that China could inflict far more damage on the American economy by selling off bonds, or simply ceasing to buy them, than by merely acquiring an oil company. If we’re really concerned about American security, alienating the Chinese hardly seems like a smart move.
Worrying about the national-security implications of a foreign investment makes sense; no one would be happy to see China take control of Lockheed Martin. But a knee-jerk rejection of cnooc’s bid would do far more harm than the bid itself. 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. As the man said, keep your friends close, but keep your enemies closer.