Oil and Security

Tuesday, July 5, 2005

THE BID by a Chinese state-owned firm for Unocal, a California-based oil and gas company, has triggered understandable concern. Oil is a strategic commodity; China has a dictatorial government. Last week an overwhelming majority of the House of Representatives voted for a measure that would impede the bid for Unocal. But however widespread and understandable, these concerns are mistaken. The reason is that China is an oil importer.

U.S. reliance on oil exporters with unsavory and potentially unstable governments is a genuine security problem. To meet global demand, all producers except Saudi Arabia are pumping oil at full capacity, which means that fairly modest disruptions -- an exceptionally cold winter in the Northern Hemisphere, for example, or an uptick of civil unrest in Nigeria's oil region -- can trigger a shortage. To stave off a price spike that could skewer the U.S. economy, the United States relies on Saudi Arabia to act as a swing producer; this gives the undemocratic Saudi regime troubling leverage. Add in the possibility that some other oil exporter -- Venezuela? -- might choose to withhold supply to blackmail the United States, and the argument for cutting domestic fuel consumption through auto mileage standards and other tools is clear.

Oil importers such as China are different, however. They have no interest in suppressing oil production to drive up prices; to the contrary, if China gains control of Unocal it will want to boost production as much as possible, which would push world prices downward and so help the United States. Those who refuse to draw comfort from this prospect argue that China might route all of Unocal's output to its own consumers, thereby depriving Americans of a source of energy. That is not actually practical, but even if it were, it would just mean that China would buy less on the open market than it would have otherwise. So there'd be less supply on the world market, but less demand also. The effect on U.S. gasoline prices would be zero.

China might pose a threat to U.S. oil security if it bought so many foreign oil fields and oil companies that it had more energy than it needed. This would put it in a position to satisfy its own consumption while hurting the United States by holding production down. But this is a far-fetched scenario. As of the end of 2004, China imported a hefty 3.2 million barrels of oil daily; by 2020, according to Booz Allen Hamilton, a management consultancy, this gap is likely to quintuple. China's stated goal is to lock in half of its imports by owning the sources or by signing long-term supply contracts. But it's not sure to achieve that ambition, let alone the far more extreme one of achieving an oil surplus. In any case, Unocal certainly isn't big enough to vault China into self-sufficiency. Its combined oil and gas output comes to around 450,000 "barrels of oil equivalent" each day, according to Booz Allen Hamilton. That's 15 percent of China's current import needs and 3 percent of the needs projected in 2020.

China's bid faces regulatory obstacles. The Chinese government proposes to finance the acquisition partly with interest-free government loans, and although this is a boon for Unocal's shareholders, some claim (almost certainly wrongly) that it violates World Trade Organization rules. Equally, some assert that Unocal's drilling technology may have military applications, so the bid may have to be reviewed on national security grounds. But however these debates play out, it's important that the temperature not be raised by spurious anxieties about oil security. Far from wanting to buy Unocal in order to gain leverage over this country, the Chinese are simply trying to protect their own economy against a future jump in oil prices. There's nothing wrong with that.

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