The Journal Editorial Report | July 8, 2005 | PBS
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briefing and opinion
July 8, 2005

Caution or China-bashing?

We were struck this week by the fact that on many fronts, people were discussing something that usually does not get much attention: energy. Part of it was that a lot of people are unhappy about paying higher prices for gasoline. Part of it was the debate over the energy bill in Congress, and especially over the safety of nuclear power plants. And part of it was noisy opposition to China's bid to take over an American oil company -- which is symbolic of China's growing challenge to the United States.

China and oil images
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China needs oil and natural gas. Unocal, of El Segundo, California has both. Opponents fear Chinese ownership of any energy assets would be a threat to U.S. security as long as we need to import more than half of what we use. China is already the U.S.'s biggest competitor for limited global energy supplies, especially oil.

The more aggressively China competes for global oil, the higher the prices go, and the more Americans pay at the pump. And, opponents worry, China is a growing military power, with geopolitical views and goals that may challenge the United States.

Proponents argue that if China is denied the right to buy Unocal, it will look elsewhere for its energy, striking economic and political alliances with countries such as Iran. Besides, proponents argue, there's already plenty of precedent -- such as Mexico, which owns 50 percent of the Deer Park, Texas oil refinery; and Venezuela's purchase of the American oil company Citgo, the fourth largest supplier of gasoline in the United States.

Today, foreign companies own 28 percent of American refining capacity. Unocal has limited oil or gas assets in the U.S. -- only about a third of its production and a quarter of its reserves -- and has no refineries or gas stations here. Its combined oil and natural gas production is less than one percent of total U.S. consumption.

What the Chinese really want are Unocal production and reserves in Asia, especially in Indonesia and Thailand. Little if any of that oil or natural gas is destined for the United States. But if the Chinese own it, the fear is that in a crisis China will keep it for itself. And Chinese thirst for oil and natural gas is only growing, which means even greater competition for the global resources.

Soon after the Chinese made their bid for Unocal, the House of Representatives voted 398 to 15 to express concern that a takeover would threaten national security, and there were several other Congressional moves to stymie the Chinese purchase. Actually, this deal would be relatively small, but it's part of a much bigger story.

PAUL GIGOT: Joining us to discuss the subject is Stephen Moore, a senior writer for the editorial board who writes about economics. Steve, this is supposed to be a private market transaction like any other merger and acquisition bid, a transaction between private companies. What explains the political opposition to it in Congress?
China and oil
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STEPHEN MOORE: It is China-bashing. You see this because China is flexing its economic muscle. It's growing at 10 percent per year, it's becoming one of our primary trading partners but competitors, too. I think if you look at the people on Capitol Hill especially, that are expressing opposition to this, they are the same people who don't want to trade at all with China. I think this is all being wrapped up in a kind of protectionist rhetoric that we have to wall ourselves off from China.

The one thing I think we should remember is the people who are going to make out like bandits if this deal goes through are the Unocal shareholders, because the Chinese have bid up the value of this company, Unocal, very significantly. Americans are shareholders. This is a shareholder society. I think this deal should go through.

GIGOT: What about some of these concerns about oil and gas reserves. Are those reserves a national security concern?

KIM STRASSEL: First of all, the reserves that we are talking about that Unocal actually has are so tiny in the United States anyway. Most of its reserves are actually in Asia. That's what's driving CNOOC's interest in this bid. This is something that's entirely about business success. They are under pressure from their own shareholders to grow, they are running out of opportunities themselves. The fabulous fit with their own company. Unocal doesn't do a lot of marketing refinery. It's all about reserves. That's exactly what CNOOC needs. In the whole, Unocal has less than one percent of global production.

GIGOT: But, Chevron argues, this isn't really a commercial transaction because there are subsidized zero percent interest loans being offered to CNOOC by its parent company, which is state-owned. Steve, how do you respond to that?

MOORE: Well, that's troubling to me, too. None of us like state-owned enterprises. We'd like to see China privatize as much of its economy as it can as rapidly as we can. But to the extent that they are subsidizing the sale, it just means they are increasing, they are bidding up the price even more significantly.

But I want to get back to this point that you raised about should we worry about our oil reserves. Look, oil is selling at 60 dollars a barrel now. There's this mentality that pervades Washington that the world is running out of oil. Every time over the last 50 years there's been an oil crisis, what's happened? The crisis has lasted awhile and then the oil price has fallen. There's a good case that can be made that the Chinese are buying this oil at the top of the market, and five to 10 years from now they may very well regret it.

GIGOT: Well, and the bid is about seven dollars a share, I think, valuation, more than the Chevron bid at this moment.

MOORE: Although Chevron may come back with a new deal, which is fine.
China and oil images
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GIGOT: Another argument made by critics of this though, Dan, is that China does not allow comparable investment by American companies in their energy sector. You can invest, but I don't believe you can get majority control. That is unfair, because we are allowing them to come here. What is your response to that?

DAN HENNINGER: Stopping this deal will make it more likely that they'll allow our companies to come into China? . I think the idea here is that, times change. China is not the Soviet Union. It is not simply an enemy that is impenetrable, that we cannot resist. China is engaged in the global economy. I think our interest here is to become more entangled with China. We have to have closer relationships with them. If we can do that through the vehicle of a large, multi-national corporation, I think it is in our interest to do that, because we want them talking to us and we want talking to them to work out these sorts of problems. None of this is to suggest that all of the concerns of the critics are going to go away. China is a troublesome player. But we want to be engaged with them, not pushing them back.

GIGOT: What if their bid was not for Unocal, which is a relatively small oil company, but were Exxon-Mobil, Steve, the biggest American energy producer? Would you be worried about that?

MOORE: No. Look, I don't think oil is the strategic resource that everyone thinks it is. I would be much more concerned if the Chinese were talking about taking over, let's say, a high technology company or an aerospace company. But oil is just guck in the ground. They are going to put it on the market, the global price of oil is not going to change. It is not as if China is an oil exporter. China imports oil, so they're going to have an incentive to put as much of this oil into the market.

HENNINGER: Just a quick footnote. CNOOC has said that they are probably going to have to divest some of their physical assets. There have been concerns that something in places like Alaska, or pipelines that feed into the national petroleum reserve, could be a strategic problem. But I think the review is going to identify those that have to be kicked out of the deal.

STRASSEL: I think America needs to remember, too, what is going to happen if we block this deal, because there is going to be big ramifications. A lot of people have made the comparison to Japan in the 1980s coming in and buying here. There is an important difference. Back then it was the business community that was really leading the charge against Japan doing this. This time it is the politicians. The business community has been very quiet, because members have assets in China, they source very low goods in China. It is very important for them that China not retaliate if we actually block this deal.

MOORE: One other quick point about this is, a lot of people were against the sale, the same people who have been saying for the last 10 years, oh my God, what is going to happen when China sells American assets? Well, here they are buying American assets, so you know, you can't have it both ways. You can't say it's going to be terrible when they start selling off the assets that they own -- a lot of U.S. securities -- and then at the same time say it's a tragedy if they buy American assets. To me, better that they're buying our assets than that they're selling them.

GIGOT: But let's take this out of economics to the geopolitical argument, because some people make the case that if you allow CNOOC to buy, take control over these Southeast Asian oil and gas reserves, you are hastening the day when their sphere of influence in Southeast Asia will only increase, their ability to influence, not just economics, but security events in Southeast Asia, in Thailand, Indonesia. Is that anything we should be concerned about, Dan?

HENNINGER: Well, you do have the little matter of the U.S. Navy floating around out in those waters.

GIGOT: That's a fair bit of geopolitical influence.

HENNINGER: I think we are going to hold dominance in that area for a long time. Now again, if we don't engage them they are going to go and try to form alliances -- commercial alliances and I dare say strategic alliances -- with countries like Iran. They are already talking to Iran. I think we would much rather have them moving in our direction than out towards countries like Iran, or even Russia for that matter. I would be much more troubled if they got closer to Russia than they got to us.
China and Oil images
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GIGOT: Condoleezza Rice, the Secretary of State, recently came in to see us. She is recused on the Chevron matter as a policy matter because she used to be on the board. But she said, "Look, the reality of China is, it's emerging, it's going to have enormous influence and growing influence no matter what we do. The question is, how do you want that influence to be felt?" She put it this way: we want it to be part of a rules-based system, where China feels it can participate and influence events, but by behaving to certain global norms, like through the World Trade Organization. In this case -- she didn't say this, but I would infer from what she said -- you are talking about a company which is making an investment through the private market, and that is playing by the rules.

If we make a decision to reject it, not based on the rules but based on the politics, what conclusion will the Chinese draw about playing by the rules?

STRASSEL: We also have to have some faith in free trade and what it ultimately accomplishes. The better CNOOC performs, the quicker China is going to have a prosperous middle class. It is that middle class that is going to demand political changes in China.

MOORE: Not just that. You're talking about a billion Chinese consumers who hopefully in the next 10 to 20 years will be a middle class society. That is a lot of people, if they could buy American goods and services. So we should not look at the global economy as a kind of situation where it is one wins and one loses. As China prospers, that is going to increase wealth here in the United States.

GIGOT: The administration seems to be really backing off of this, because I think they fear the political ramifications. They see what is going on in Congress, but that has some dangers, doesn't it? Because that means that Congress, as it is wont, can sometimes run out of control here.

MOORE: This is a very dangerous situation right now, and beyond CNOOC. It is the whole situation with China. We talked about this on the show in previous weeks, the whole rash of protectionism. There is that 25 percent tariff idea that has a Republican, Democrat, co-Sponsor. That would do great damage to the American economy right now if that was to proceed.

GIGOT: I agree with you. It is one of the biggest political, economic risks out there. Very quickly -- I want to get quick answers from all of you. Is CNOOC going to prevail on this? Or is Chevron?

MOORE: If Chevron increases its bid, then they make take this over. But I believe whoever makes the highest bid should take it.

HENNINGER: My guess is that Chevron's has got to step up to the plate, protect itself.

STRASSEL: I think that what CNOOC is fighting against is the political baggage that is going to come with this. If it loses, it will be in large part because of that.

GIGOT: Because of the politics. I think that's right, but I think Chevron is going to have to cough up a little more cash if it wants to win this.