Last Week

Chinese Bid for Unocal Adds Fuel to Fire

Sunday, June 26, 2005

From China's perspective, it makes perfect sense: Buy an American oil company to help secure enough energy to fuel its rapidly growing economy. The country is the world's second-largest consumer of oil after the United States. Its old state-subsidized factories are energy-inefficient. With incomes rising, people are dumping bicycles for cars. Its industrial regions are suffering shortages of the fuel needed to generate power.

But the timing was unfortunate here in Washington when state-owned CNOOC Ltd., China's third-largest oil company, bid $18.5 billion to buy Unocal Corp. Both Republican and Democratic members of Congress were already considering a variety of trade measures aimed at punishing China. Some U.S. lawmakers seek to push back the rising tide of Chinese exports to the United States. Some want the Chinese government to crack down on piracy of intellectual property and to buy more goods from overseas.

Then on Thursday, oil prices jumped briefly above $60 a barrel because of growing global demand for crude amid tight supplies.

Add to that the fact that CNOOC is controlled by China's Communist Party government, and the bid quickly inflamed U.S. political fears of China's growing economic strength and military power. Analysts worried about the potential effect on oil prices if China decided to hoard supplies for its own use. House and Senate members immediately demanded that the Bush administration review China's Unocal offer under the Defense Protection Act to determine the potential economic and security risks. Treasury officials indicated they would do so if Unocal accepts CNOOC's offer. Unocal already had tentatively agreed to a $16.5 billion bid from Chevron Corp. in April.

Lawmakers expressed similar concerns decades ago when Japan was buying up American companies, skyscrapers and golfing resorts. But the fears proved unfounded. No one on Capitol Hill would trade today's strong U.S. economy for Japan's more anemic one.

Still, rising oil prices stir concern among many Americans who remember the early 1980s, when crude costs were much higher than now, after adjusting for inflation. Oil price surges then combined with cheap money to fuel soaring inflation, forcing the Federal Reserve to ratchet up interest rates, which triggered deep recessions.

The U.S. economy today, by contrast, has felt few ill effects from the rise in oil prices over the past year. Economic growth has continued at a healthy pace, while consumer price inflation has been tame for items other than food and energy.

But the economic effects could worsen, analysts warned, if oil prices shot up abruptly because of some event that sharply reduced worldwide crude supplies.


© 2005 The Washington Post Company