What’s all the fuss? An energy company based in Hong Kong called CNOOC, Ltd. — small by international standards — a few weeks ago bid $18.5 billion in cash to buy another small energy company, Unocal, based in California. The bid was nearly $2 billion higher than a previous offer for Unocal by Chevron, a larger U.S.-based firm.
It’s a straightforward transaction — one of dozens of billion-plus deals each year that involve global corporations. But it has ignited a storm of controversy.
The House of Representatives voted to deny the Treasury Department any funds that might be used to recommend approval of the offer and then passed a resolution that asked President Bush to review the deal. A co-sponsor of that resolution, Rep. Joe Barton of Texas, the chairman of the Energy and Commerce Committee, called CNOOC a “front company for the Chinese communist government.”
It’s true that 71 percent of the company is owned by China National Offshore Oil Corp., which is controlled by the Chinese government. But it’s also true that CNOOC, Ltd., is capitalist enough to list its stock on the New York Stock Exchange as American Depositary Shares.
Should Americans worry that the Chinese want to buy one of our energy companies? Absolutely not. What we should worry about is the intervention of politicians into areas that are none of their business.
Unocal shareholders will be big winners (their stock is already up more than 50 percent in the past six months), and they can recycle the money the Chinese pay them into other U.S. investments — or buy a new Cadillac, for that matter.
CNOOC shareholders are another matter. Does it really make sense to spend all that money on an energy company when oil prices are at an all-time high? Buying low is usually a smarter strategy.
It appears that the Chinese want to purchase Unocal to secure future energy supplies. China is gulping huge quantities of oil and gas to keep its economy growing at 9 percent, so its leaders want to be sure of meeting needs down the road.
That’s the logic of central planners, but it makes little sense in a global market. While some of Unocal’s reserves are in the United States, the majority is spread around the globe, in countries like Bangladesh, Congo, and Indonesia, where political uncertainties mean that supply can be disrupted any time.
Also, China doesn’t have to own an oil company to get its oil — any more than a taxi company needs to own an automaker to get its autos. Oil is fungible — it’s a commodity the same the world over — and sellers abound.
The Chinese economy has performed exceptionally well in recent years, but government leaders can’t resist the urge to direct it — to allocate capital for reasons that have little to do with sound business judgment. That may be happening here.
Of course, U.S. politicians have the same disease. They, too, are stepping in where they don’t belong, and, for that reason, you can hardly blame the Chinese. They hear the bleating of protectionists on Capitol Hill and think, “Americans may want to deny us oil years from now, so let’s move quickly to secure it while we can.”
But there is no reason for the United States to fear CNOOC’s bid. Opponents should be ashamed of themselves. China’s economy is smaller than Italy’s and less than one-sixth the size of our own [1]. As for national security, Unocal has just 2 billion barrels of proven reserves compared, for example, with 8 billion for Chevron. Why are we quaking when a little Chinese company wants to acquire a little American one? (By the way, the Chinese company says, quite logically, that it will continue to sell Unocal’s U.S.-produced oil and gas in the U.S., where it’s right near by.)
China’s acquisition of Unocal’s assets will almost certainly lead to more exploration (especially in the Gulf of Mexico and off Indonesia), and that increase in supply should lower gasoline prices at the American pump and electricity-generating costs at U.S. utilities. Still, there are no guarantees. CNOOC may hit dry holes.
All that’s certain is this lesson, which applies both to China and America: Pols should stay away. Let managers and shareholders make their own choices, based on sound business judgment, not on fear, jingoism or just bad economics.
[1] Editor’s Note: In 2004 Italy ranked 6 for GDP (Gross Domestic Product ) and China ranked 7. So China’s economy was smaller at that time–but not by much. Also as China has become more free it’s GDP has been growing; Italy’s has been stagnant. For 2005, it looks like China will surpass Italy.
