If China National Offshore Oil Corp., or CNOOC, wins the bidding war for Unocal, the El Segundo, Calif.-based oil company, does it follow that that the newly acquired energy will be diverted to China? Not necessarily. Oil is a fungible commodity, and so it’s consumed by the highest bidder, the New Yorker’s James Surowiecki argues. “In today’s world whether or not you own the means of oil production doesn’t affect your access to the stuff.”
Perhaps, but then why is CNOOC, which is owned primarily by the Chinese government, so eager to buy the means of production? For some clues, we turn to Fu Chengyu, CNNOC’s chairman and CEO, who writes in today’s Wall Street Journal (subscription required): “We have made our offer because Unocal’s asset base fits our business extremely well — 70% of its oil and gas reserves are close to Asian markets where we operate.”
Why not simply buy the oil and gas in the open market? Clearly, CNNOC believes that owning trumps buying on an as-needed basis.
As for the worries that CNNOC will redirect oil and gas to China, thereby depriving the American market of the energy, Fu dismisses the fear. In fact, he pledges the opposite. “I promise that we will continue Unocal’s sales practice of selling all, or substantially all, U.S. oil and gas in U.S. markets.”
In the meantime, it behooves the U.S. to tread lightly, if at all, when it comes to CNOOC’s proposed purchase of Unocal. China, after all, holds an estimated $700 billion of in dollar-based foreign reserves. As Surowiecki notes, “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.”
But none of this changes the fact that demand for oil is rising and supply may not keep pace in the years ahead. What’s more, all the talk of oil as a fungible commodity, whose price is set by a free and open marketplace ignores the fact that for most of the oil industry’s history the price of crude has been manipulated in varying degrees, and the game continues today. Yes, the development of futures trading linked to oil has made manipulation tougher. But it’s naïve to think that access to oil is unfettered and the pricing mirrors the idealized supply and demand curves found in economics textbooks.
Consider, for instance, the fact that China’s eager to build a strategic petroleum reserve. And who can argue? The U.S. government, after all, holds more than 600 million barrels of crude in reserve in case of supply disruption. As China, India, and a few other countries build comparable emergency reserves the result will have no small impact on the price of oil. What’s more, the impact will be unrelated to supply and demand at the moment.
History suggests that at critical moments there’s a large and obvious benefit to owning oil supplies vs. trying to buy them in the open market. Sometimes the latter’s just not possible. That’s not necessarily a reason for the U.S. government to prevent CNOOC’s purchase of Unocal. At the same time, America should recognize the motivation for China’s growing interest in oil reserves.
To be sure, the Unocal deal is trivial in the grand scheme of the oil business. The true significance of CNOOC’s attempt at acquisition is what it suggests for the future. China’s $700 billion of dollar reserves are burning a whole in its national pocket. As fate would have it, China’s demand for oil is also rapidly outpacing its capacity to produce it domestically, resulting in a sharp rise in imports, according to the Energy Information Administration. A confluence of events that may have more than trifling implications going forward.
Today Unocal, tomorrow….?