Politics influenced the final outcome of bargaining for Unocal. China lost, but we can expect it to retaliate.
On April 4, directors of Unocal, the twelfth largest U.S. oil company (rated by the Forbes survey of 2000 World’s Biggest Companies) accepted a $16.5 billion offer to be bought by Chevron, the second largest U.S. oil company. The offer was one quarter in cash and three quarters in Chevron stock. However, on June 22, the Chinese National Offshore Oil Corporation (CNOOC), the third largest Chinese oil company, and a company smaller than Unocal, made a counteroffer of $18.5 billion in cash, financed in part by low interest rate loans from its state-owned parent company.
In mid-July 2005, Chevron increased its bid to $17.3 billion, turning up the heat on CNOOC to respond with a higher bid of its own. Although higher, CNOOC’s offer faced “unprecedented political opposition” in Washington , leading it to withdraw its bid on August 2, thus leaving it to Chevron to complete the takeover. This comes as no surprise, for when it comes to oil bargaining, political factors rule over economics.
Unocal is a relatively small player in U.S. markets. Its American production is barely 57,000 bpd, or 0.8 percent of total U.S. crude oil production and 0.3 percent of total U.S. crude oil consumption. If considering only these, and no other factors, it makes no sense that CNOOC’s effort aroused intense opposition in Congress, evident in the letter to the Treasury Department, in which 41 Republican and Democrat politicians raised their concerns that Chinese takeover of Unocal could compromise national security. In response, the Treasury Secretary John Snow warned that U.S. firms would face increasing difficulty competing with Chinese oil companies for “scarce energy resources.”
Why did the mercantilist factors rule over liberal rhetoric in the Unocal bargaining game? There are three major reasons which explain this, two of which come from the American side, and one from the Chinese side. Firstly, by stopping its acquisition of Unocal Washington is trying to limit Beijing ‘s emerging political and military power. Some of Unocal’s possessions and activities are located in strategically important regions, which are becoming areas of competition between the U.S. and China . Secondly, Unocal carries the symbolic value. Finally, CNOOC offer was not strictly commercial, as the bid would not be possible without the help of Chinese government.
Unocal produces oil and gas in 9 countries outside of the United States – Thailand , Vietnam , Indonesia , Bangladesh , Myanmar , The Netherlands, Azerbaijan , Congo , and Brazil , and 70 percent, of its oil and gas reserves are located in Asia . Further, Unocal is a significant provider of natural gas to Southeast Asia (The Philippines, Bangladesh , and Thailand ), a primary investor in Baku-Tbilisi-Ceyhan (BTC) Pipeline, and it owns sensitive undersea mining technology. If Unocal was sold to the CNOOC, the Chinese government would gain a share the in recently launched BTC pipeline, which carries oil from the Caspian to the Mediterranean, and then to the export markets in the U.S. and Europe . If China acquired a share through CNOOC, it would gain a foothold in a region of utmost strategic importance to the United States . Moreover, it could use the pipeline to fuel its own hunger for oil.
Additionally, China would further establish its presence in the Southeast and South Asia at the American expense, by controlling the production and provision of oil and mostly natural gas to the Philippines , Thailand , Vietnam , Myanmar , Indonesia and Bangladesh . South and Southeast Asia are regions of increased strategic competition between the United States and China , and it would be unlikely for the U.S. to give up its possessions.
Finally, by acquiring Unocal which has some possessions in Brazil , China would further establish its energy related activities in South America . It already ventured to several Latin American countries ( Venezuela , Argentina , Ecuador , and Brazil ) and in Canada , raising quite a few eyebrows in Washington . Furthermore Chinese energy involvement in America ‘s backyard is threatening the future security and availability of the increasing U.S. demand for (imported) oil and gas, a large part of which come from Latin America and Canada . Former CIA chief R. James Woolsey claimed that it is “naïve” to think that the attempted Chinese takeover of Unocal is just a commercial matter, and that it is unrelated to China ‘s strategy for domination of world energy markets and East, South and Southeast Asia .
The second reason why politics rule economics in bargaining for Unocal is symbolic. Regardless of whether Chinese takeover of a relatively small American oil and gas firm is a risk to U.S. national security, energy remains a strategic commodity, thus the Chinese purchase of Unocal would have carried a lot of symbolic value. It therefore comes as no surprise that besides Congress, 74% of the U.S public polled by the Wall Street Journal also opposed the deal. American politicians’ and public objections to the deal parallel those heard in the 1970s, when Saudis recycled their petro-dollars by buying into U.S. industries, and in 1980s, when Japan embarked on a buying spree of American assets. Then, as now, congressmen spread misguided fears of excessive foreign control and national-security threats. Every time a non-Western “invasion” is perceived by the public and politicians, respite its liberal rhetoric America gets mercantilist. Saudi acquisition in the U.S. steel industry, Japanese acquirement of Rockefeller Center or communist Chinese attempt to buy Unocal all carry enormous symbolic value which due to hostility towards the Saudis, the Japanese or the Chinese, brings in public and political opposition to those countries acquiring important assets in the United States.
The third and final reason why politics dominated the economics in bidding for Unocal comes from the Chinese side. Liu Jianchao, a spokesperson for China ‘s Foreign Ministry, claimed that in bargaining for Unocal “commercial activities should not be interfered in or disturbed by political elements.” In addition, CNOOC Chairman Fu Chengyu stated, “the bid is simply a normal business activity based on the principles of the free market.” However, the Chinese side failed to keep activities strictly commercial in the first place. CNOOC planned to pay for Unocal by using substantial loans ($7 billion) from its parent company (also called CNOOC), $6 billion from a major Chinese government-owned bank (Industrial and Commercial Bank of China), and only $3 billion from its financial advisers (JP Morgan and Goldman Sachs). The U.S. Treasury Department was not impressed by this plan, which was clearly driven by Chinese government policy. Further evidence of this is that the $7 billion loan from the government-owned parent company would come with just 3.6 percent interest, lower than 4.2 percent which U.S. government treasury bonds yield, and interest-free loan from the government-owned bank.
What are the consequences of an unsuccessful Chinese bid for Unocal? We can expect China to retaliate. It could start buying European Airbus airplanes rather than American Boeings. It could offer more (diplomatic and other) help to Iran in building up its nuclear capacity. It could threaten to stop cooperating with the U.S. in negotiations with North Korea . Moreover it could stop recycling its trade surplus by purchasing the U.S. treasury bonds, and therefore stop financing Bush’s economic experiment. All this is uncertain. However, China will certainly get more assertive in its attempt to secure sufficient energy in order to fuel its economic growth. The bottom-line is that the United States and China are competing for global (economic) hegemony. In order to secure adequate energy supplies and in line with this competition, in oil bargaining, politics will continue to rule economics. In 2004, Chinese oil consumption grew by 16 percent and its overall energy consumption by 15 percent. Rise in demand was by and large met by increasing imports. In order to feed its growing hunger for (imported) energy expect China to get more assertive in securing oil and gas supplies from the Middle East, Central Asia, South America and Africa, regions which provide the U.S. with a large share of its own imported oil.