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July 8, 2005



PAUL GIGOT: 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, and especially over the safety of nuclear power plants. And part of it was noisy opposition to the bid of the Chinese company CNOOC, to take over an American oil company, which is symbolic of China's growing challenge to the United States.

PAUL GIGOT: 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. And joining us to discuss it is Stephen Moore, a senior writer for the editorial board writing about economics. Steve, this is supposed to be a private market transaction like any other merger and acquisition bid, a fight between private companies. What explains the political opposition to it in Congress?

STEPHEN MOORE: It's 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. And 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. And 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 is the Unocal shareholders, because the Chinese have bid up the value of this company, Unocal, very significantly. And that's you, and me, and Dan -- Americans are shareholders. This is a shareholder society. I think this deal should go through.

PAUL GIGOT: But just to clarify, we personally don't own stock in Unocal... [LAUGHTER] You're talking about a general point.

STEPHEN MOORE: Good clarification. I mean, I'm talking about the hundred million Americans who own shares of Unocal stock.

KIM STRASSEL: Yeah, and not just Unocal. They own shares of CNOOC, too. I mean, it's listed publicly.

PAUL GIGOT: But what about some of these concerns, Kim, for example, the issue is oil and gas reserves principally. Are those reserves a national security concern?

KIM STRASSEL: Well first of all, the reserves that we're talking about that Unocal actually has are so tiny in the United States anyway. Most of its reserves are actually in Asia. And that's what's driving CNOOC's interest in this bid. This is something that's entirely about business success. You know, they're under pressure from their own shareholders to grow, they're 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. And in the whole, Unocal has less than one percent of global production.

PAUL 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?

STEPHEN 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're subsidizing the sale, it just means they're increasing, they're 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.

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

STEPHEN MOORE: Although Chevron may come back with a new deal, which is fine.

PAUL 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. And that's unfair, because we're allowing them to come here. What's your response to that?

DAN HENNINGER: And stopping this deal will make it more likely that they'll allow our companies to come into China? I mean, I think the idea here is that, you know, 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. And 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.

PAUL 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?

STEPHEN 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, and I don't see -- you know, they're going to put it on the market, the global price of oil isn't going to change. It's 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 as possible.

DAN HENNINGER: Just a quick footnote. CNOOC has said that they're 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.

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

STEPHEN 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's going to happen when China sells American assets? Well, here they're 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 American, 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.

PAUL 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're 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, that sort of thing. Is that anything we should be concerned about, Dan?

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

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

DAN HENNINGER: Yeah. And I think we're going to hold dominance in that area for a long time. Now again, if we don't engage them they're going to go and try to form alliances, commercial alliances and I dare say strategic alliances with countries like Iran. They're already talking to Iran. And I think we'd 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.

PAUL GIGOT: Condoleezza Rice, the Secretary of State, recently came in to see us. And she's 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? And she made the point, 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. And in this case -- she didn't say this, but I would infer from what she said -- you're talking about a company which is making an investment through the private market, and that's 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?

KIM STRASSEL: Well, and we also have to have some faith in free trade and what it ultimately accomplishes. You know, the better CNOOC performs, the more , the quicker China is going to have a prosperous middle class. It's that middle class that's going to demand political changes in China, and ultimately, hopefully, make this a ...

STEPHEN 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's a lot of people, if they could buy American goods and services. So we shouldn't look at the global economy as a kind of situation where it's one wins and one loses. As China prospers, that's going to increase wealth here in the United States.

PAUL GIGOT: You know, one person I haven't heard in this debate is -- well, first, the White House. The administration seems to be really backing off of this, because I think they fear the political ramifications. They see what's 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.

STEPHEN MOORE: Yeah, this is a very dangerous situation right now. And beyond CNOOC. It's the whole situation with China. We talked about this on the show in previous weeks. But the whole rash of protectionism, there's 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.

PAUL GIGOT: I agree with you. It's 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?

BRET STEPHENS: Well, if Chevron increases its bid, then they make take this over. But I believe whoever makes the highest bid should take it.

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

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

PAUL GIGOT: Because of the politics. Yeah, 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. All right, thank you very much. Next subject.