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Thesis & Antithesis

A critical perspective on energy, international politics & current affairs

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Location: Washington, D.C.

greekdefaultwatch@gmail.com Natural gas consultant by day, blogger on the Greek economy by night. Trained as an economist and political scientist. I believe in common sense and in data, and my aim is to offer insight written in language that is clear and convincing.

05 July 2005

CNOOC after Unocal

It is fitting that Sino-phobia has been given a new poster-child; after fuming about Chinese wages and the yuan’s peg to the dollar (both believed to cause all that is bad in America), American policymakers have turned their attention to Unocal, an energy firm, for which The China National Offshore Oil Corporation (CNOOC) has made a generous bid ($18.5 billion). What makes the mania seem credible is that CNOOC is partly owned by the Chinese government (70.6%); hence, the skeptics claim, Unocal will not be run commercially but will be forced to serve the interests of the Chinese government, threatening America’s ever-elusive “energy independence.”

To begin with, the Chinese bid is based on an increasing appetite for oil, and more importantly, on a growing demand for gas; as The Economist wrote, “CNOOC's state-owned, unlisted parent company—which still owns 70.6% of the listed CNOOC—is building up to ten giant liquefied-natural-gas terminals along China's east coast. All that it needs now is the gas. Three-quarters of Unocal's gas reserves (and a quarter of its oil) are in Asia (mostly Indonesia, Thailand and Bangladesh) and may be double previous estimates” (23 June 2005).

What is more, China’s desire to spend some of its dollars to buy a firm, rather than more American treasuries, is a sound financial move. America’s lax monetary policy is being exported to China, which is forced to pursue its own lax policy in order to maintain a fixed peg to the dollar; by investing in non-financial assets, the Chinese government is reducing its stock of US dollars, and therefore, can reduce the stock of yuan in circulation as well, thereby gaining more independent control of the money supply.

The Economist’s finance column, Buttonwood, writes, “The trouble is that if China makes a habit of snapping up vulnerable American companies, it might decide to buy fewer Treasuries—and that could cause trouble.” But this is not the only likelihood: seeing how US treasuries are less fungible than expected—since they cannot be safely used to, say, buy a company like Unocal—the Chinese might start desiring a higher price for their unending purchase of US bonds, thereby driving up their price.

The fear that the Chinese purchase could undermine America’s energy security is also questionable; if China satisfies its oil demands from Unocal, it will decrease its oil demands from elsewhere—the price of oil depends on the supply and demand for it, not on the commercial decisions of one firm about whom to sell to.

There is a political danger as well; one of the promises of liberal internationalism is that commercial relations between states can increase political cooperation and mitigate the forces that lead to war. But if China ceases to believe that it can satisfy its energy needs in the open market, it might have to resort to political means for getting the same results; surely it is better for China to buy Unocal than to form political alliances (as it has done in Sudan, for example) to secure its oil.

In one of the world’s most tight markets, where demand is far outpacing supply, the buying of Unocal by CNOOC is hardly a serious disruption; which is all the more reason to avoid a serious political row with China. It would be foolish to fight over a symbol, particularly when then the oil market is facing far more serious troubles.

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