Many Oil Experts Unconcerned Over China Unocal Bid

Fears about China's grab for oil reserves are at odds with experts' views of how global oil markets work.
Fears about China's grab for oil reserves are at odds with experts' views of how global oil markets work. (By Andrew Wong -- Getty Images)
By Paul Blustein
Washington Post Staff Writer
Friday, July 1, 2005

The Chinese are coming -- for a U.S. oil company. So should Americans worry, or shrug?

Alarms are ringing on Capitol Hill over last week's takeover bid by CNOOC Ltd. for Unocal Corp. The proposed $18.5 billion deal, lawmakers warn, has ominous implications for national security -- in particular, the security of U.S. oil lifelines.

Congressional heavyweights voicing opposition include Rep. Joe Barton (R-Tex.), chairman of the House Energy and Commerce Committee, and Rep. Ralph M. Hall (D-Tex.), chairman of the subcommittee on energy and air quality. The ability of the United States to obtain the oil and gas needed to fuel its economy, they wrote in a June 27 letter to President Bush, is "threatened by China's aggressive tactics to lock up energy supplies around the world that are largely dedicated for their own use."

But it is hard to see how the Chinese purchase of Unocal could affect petroleum availability or otherwise endanger U.S. security, many global energy experts say. China may be a potential military adversary, and congressional frustration over Chinese trade policy drives much of the animus toward the deal. Still, some fears about China's grab for oil reserves are at odds with experts' view of how global oil markets work.

Those markets are vast and fluid. Known oil reserves exceed 1 trillion barrels, daily production averages more than 80 million barrels, and traders readily swap tankers full of crude to balance excess demand in some parts of the globe with excess supply elsewhere. Accordingly, said Philip K. Verleger Jr., an energy specialist at the Institute for International Economics, "there is absolutely no reason why we should care" who owns Unocal's oil and gas reserves, which total about 1.75 billion barrels.

Even though Chinese control over Unocal's reserves, which are mostly in Asia, might ensure that the company's petroleum was shipped to China during an energy shortage, "the cost of oil will be set between world supply and demand, and not by arrangements like this," agreed Robert J. Priddle, the former executive director of the Paris-based International Energy Agency. "This won't change the price of oil, or the availability of oil."

Priddle said that critics of the CNOOC bid are correct in noting that China behaves unlike most oil-market players. China depends on imports for about one-third of its oil needs, so Chinese leaders have struck deals in Latin America, Canada, and also in countries unfriendly to the United States, notably Iran and Sudan. CNOOC, which is 70 percent owned by the Chinese government, may be seeking to buy Unocal at the behest of top officials in Beijing, Priddle said.

"They're in a panic; they're relatively newly dependent on oil imports, and think they must do something to secure their own supply," he said.

During the oil crises of the 1970s and 1980s, Priddle and other experts recalled, several European countries established national oil companies with the aim of assuring supplies, and nations such as France cozied up to Iran, Iraq and other oil suppliers. But when oil shipments were cut off, "they had the same problems we did" with higher energy prices, said Amy Myers Jaffe, associate director of the energy program at Rice University's James A. Baker III Institute for Public Policy.

"Owning reserves doesn't change the price," Jaffe said. "If the price of oil goes to $125 a barrel, and China owns a field in Sudan, the price for them is still $125." By hoarding oil for their own use, the Chinese would miss the chance to sell at the higher price, which would effectively cost them the same as if they bought oil on the open market, she said.

Under such a scenario, the United States would be able to obtain the oil it needed regardless of who owns the reserves being pumped. "The U.S. economy is a very strong economy; if there is a sudden cutoff of Saudi oil, and Americans suddenly have to pay a lot more to get gasoline, we'll do it," Jaffe said.

Some critics of China dispute these arguments, and contend that the interagency Committee on Foreign Investment in the United States should scrutinize the deal. This body can block the foreign purchase of a U.S. firm or insist on new terms, though it has rarely found grounds for such actions.

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