Chinese Checkers: Strategy, Security, Globalization, and Oil

The Chinese National Offshore Oil Corporation has offered to buy American oil company UNOCAL, outdoing Chevron by more than $2 billion with an $18.5 billion cash bid.

Economists and lawmakers have varying reactions to the Chinese company’s offer, which reveals delicate relationships between energy and security and between the U.S. and the emerging superpower.

The Chinese need energy

The Chinese National Offshore Oil Corporation (CNOOC) is almost an extension of the Chinese government itself, since the government owns 70 percent of the company. Therefore, the CNOOC bid can be seen as an attempt by the Chinese government to secure energy supplies, not just as an everyday merger and acquisition focusing on profits.

China’s burgeoning economy, especially as the leading manufacturing nation in the world, demands natural resources to fuel production, especially one of the scarcest resources: oil. Without growing manufacture China cannot find jobs for the millions of its citizens who are leaving farms for the cities. Ten years ago, China exported more oil than it imported. Now it’s the second-largest importer after the U.S.

But the Chinese don’t want to just keep buying oil from foreign companies; they want more control over their economic growth. If, for example, China went to war with Taiwan, the United States could cut off part of China’s oil supply (the U.S. has pledged to defend Taiwan in the event of Chinese attack), greatly disrupting China’s trade and economy. This sort of scenario is just what China hopes to avoid by taking control of its energy resources.

From one point of view, China is scrambling to organize its oil supply and secure its economy. From another, the bid for UNOCAL is proof of a strong and robust China.

How would CNOOC affect our oil supply and workers?

If the Chinese bid were accepted, oil and gas produced by UNOCAL in the U.S. and Gulf of Mexico would continue to supply the U.S. market, since CNOOC would have to continue to honor UNOCAL’s current distribution contracts.

CNOOC would also be likely to keep UNOCAL workers since they want to maintain American management and skill, whereas Chevron has plans to issue pink slips.

From this point of view, the CNOOC takeover could be good for the U.S. economy. UNOCAL stockholders would benefit from the larger bid, and the company’s workers would keep their jobs. All of this with little consequence to our oil supply. Or is there an effect?

Security and energy - the tradeoffs

Legislators who are concerned about a Chinese buyout say that it’s a threat to national security. But the sale would not increase our dependence on foreign energy; the majority of UNOCAL’s natural gas reserves are already drawn from Asia.

But blocking China from buying UNOCAL could compromise our security as well: we need China to help defuse the nuclear threat from North Korea. Failure to cooperate with China could disrupt the U.S.-China partnership.

We also depend on China to buy U.S. Treasury bonds, which help to fund Iraq and manage our debt. If China were to stop buying bonds, it would damage our economy and therefore our security.

The Chinese government and press have asked that the U.S. government stay out of the bidding for UNOCAL and treat it as just another open competition in a capitalistic global economy.

President Bush has not made a statement about the CNOOC bid. The White House tends to be in favor of globalization and against government intervention in the market, but is probably reluctant to endorse the foreign buy of UNOCAL while President Bush is pushing for independence from foreign oil. The Bush administration has often taken a fairly hard line with China on trade, wages, and currency values. Now it has a new relationship to knit into the other issues.

There are clear tensions between globalization and independence, security and energy, which force us to ask difficult questions. How do we reconcile the benefits of globalization with the threats of national security? How do we compete for natural resources while being diplomatic? How do we protect what we need while bargaining for what we want? What is the role of the U.S. on the world stage? What should it be? What can it be in the future?

What do you think?

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Article Posted on: 6/30/2005