Wasted energy

Amy Myers Jaffe The New York Times

Copyright The New York Times
THURSDAY, JULY 28, 2005
HOUSTON China’s oil thirst
Lately there has been much grandstanding about the dangers of the bid by a government-backed Chinese oil company, Cnooc, for Unocal. But American protectionists are focusing on the wrong target.
It’s true that China could be a threat to American energy security some day, but not because it wants to buy an American company already on the block. Before American politicians intervene to make sure that Unocal’s Indonesian gas and oil fields remain in the hands of a U.S. corporation, they would do well to recall some history.
In the 1930s, the Japanese government, urged on by the Japanese military and domestic oil firms, began asserting control over oil imports, refining facilities and oil resources in its colonies in China to the detriment of the Western companies, which, at the time, owned the majority of Japan’s oil business. The Japanese government considered this a vital move to protect the country’s security.
But American and European oil companies protested. In August 1934, Walter Teagle of Standard Oil and Henri Deterding of Royal Dutch Shell lobbied Washington to frighten Japan into moderation by hinting at a cutoff of American oil exports. The State Department demurred, but mutual tension over oil supplies escalated into paranoia and contributed to the build-up to World War II.
The outcry over China’s potential acquisition of Unocal may or may not partake of the same kind of historical dynamic. But in reality, China’s purchase of Unocal’s Indonesian assets is hardly a threat that merits the rise in bilateral tensions and political gamesmanship that could follow an American effort to block the Cnooc deal.
In fact, even if the Chinese acquired Unocal – which seems less likely now that a rival bidder, Chevron, has sweetened its offer – Cnooc’s oil output would still be a small fraction of that of top American companies.
Chevron, for example, produced more than 1.8 million barrels a day in 2004 from reserves holding close to 8,599 million barrels. Cnooc barely produces a tenth of that from its overseas holdings. The top three American firms – ExxonMobil, Chevron and ConocoPhillips – together produced about 5.6 million barrels a day last year. It is hard to imagine how China’s purchase of Unocal’s limited oil assets would threaten such powerful American companies or the United States itself.
Moreover, it is in the American interest to promote open access to foreign investment in oil exploration and production. Without it, American oil companies could not survive.If anything, the United States should be pushing policies that expand such access in oil-rich countries like Iraq, Mexico, Russia and Saudi Arabia.
That said, there is real reason for American concern about China’s suddenly voracious oil thirst. Right now, that thirst translates into a willingness to overbid for assets like Unocal. But to what strategies might China turn if Western competitors prevent it from acquiring choice assets?
Already, China has secured some very attractive oil acreage in countries with which the United States has had troubled relations – notably Iran, Sudan and, more recently, Venezuela. In some cases, the Chinese have purposely gone this route to take advantage of American sanctions policies.
In doing so, they’ve helped to undermine the effectiveness of U.S. efforts to isolate these nations, and they’ve given such countries the impression that so long as they have oil, they can fruitfully play China and the United States against each other.
From economic ties, political and military relationships often follow, and these pose even more fundamental risks to American security. China has begun expanding its light arms trade in many of the countries that supply it with oil.
In Sudan, China has had to deploy quasi-military personnel to protect its oil facilities from local insurgents. And Beijing initially took a nonconstructive position on the crisis in Darfur, mainly because it couldn’t afford to alienate the Sudanese government, since the China National Petroleum Corp. has a big presence in Sudan’s prolific Heglig field.
As China’s energy requirements expand, Beijing’s tactics could become more assertive, even aggressive. It is certainly not in America’s interest for China, a nuclear power, to be increasingly susceptible to political pressure from oil-producing states, or for it to lock out other consuming nations from sources of energy.
The United States won’t enhance its security by threatening to obstruct China’s Unocal purchase. Instead, American policymakers should explore the possibility of a constructive, high-level dialogue with China on energy and the Middle East.
The U.S. Department of Energy runs an alternative energy research program with Beijing that could serve as a good example of how to nurture common interests. America would also be wise to bring China into the oil emergency stockpiling system in coordination with the International Energy Agency, because reducing the risks to China’s supply is a winning strategy for the United States, too.
For now, the United States can afford to take the high road. China won’t be a serious economic rival for years to come. And maybe by that time, its political stance will have changed on key issues like North Korea, Iran, intellectual property and, most important, human rights.
In the meantime, we should not forget that if it wanted to, the U.S. Navy could block China’s access to Cnooc’s foreign oil any day of the week. China, however, would have difficulty imposing such a blockade on American companies. It’s true that as an oil importer, China is on the rise. But who here is really a threat to whom?
The United States should take a step back and see the Unocal bid for what it is – a move to be settled by the market.
(Amy Myers Jaffe is a fellow for energy studies at the James A. Baker III Institute for Public Policy at Rice University.)


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