- The Washington Times - Thursday, June 30, 2005

China’s seemingly insatiable appetite for energy, reflected over the past year in the soaring world price of oil, manifested itself in another form last week. The China National Offshore Oil Corp. (CNOOC), the nation’s third-largest oil firm that is 70 percent owned by the Chinese government, made an $18.5 billion unsolicited, all-cash bid for Unocal, the ninth-largest energy firm based in the United States.

If consummated, it would be by far the largest Chinese direct investment in a foreign corporation. Thus, China has now provided an answer to anybody who wondered what it could do with some of its $660 billion in foreign-currency reserves, which include nearly a quarter of a trillion dollars worth of U.S. Treasury securities. Moreover, given that 100 percent of last year’s record nominal U.S. budget deficit of $413 billion was effectively financed by foreign investors, including Asian central banks, consider the irony of the Chinese government liquidating a small portion of its U.S. Treasury securities to finance the purchase of 100 percent of America’s ninth-largest oil company.

A California-based multinational energy company, Unocal had already agreed to be acquired by Chevron, the second-largest U.S. oil firm, for $16.6 billion in cash and stock. By any standard, CNOOC’s nearly $2 billion premium isn’t pocket change. If the Chinese bid is approved by the U.S. government, about which more will be written in a subsequent editorial, Unocal shareholders could easily afford to pay Chevron a required $500 million break-up fee and still pocket nearly $1.5 billion above and beyond Chevron’s offer.

Unocal’s oil and natural-gas reserves total 1.75 billion barrels of oil equivalent, nearly 70 percent of which are located overseas, mostly in Asia. With oil selling at a market price of $60 per barrel in recent days, CNOOC will be paying about $10 per barrel of oil equivalent. Looked at another way, the $18.5 billion purchase price of Unocal would represent about 10 percent of the trade surplus China accumulated with the United States last year alone. To all of those who have been mockingly insisting for years that China has been selling real goods to U.S. consumers in exchange for “pieces of paper”: Be advised that the Unocal stock certificates, admittedly printed on paper, represent real, long-term, income-generating assets.

Last year, China surpassed neighboring Japan as the world’s second-largest oil consumer. Today, China and Japan are vigorously competing to be the primary pipeline destination for the output of some of Russia’s largest oil fields. China and Japan are also sparring over offshore oil deposits in the East China Sea.

By 2025, according to the U.S. Department of Energy, China will be consuming nearly 13 million barrels of oil per day. That is more than double its current level of 6 million barrels per day. Virtually all of China’s increased consumption will have to be imported. Meanwhile, U.S. oil imports are projected to increase by 8 million barrels per day by 2025. It is fair to say that the latest edition of “The Great Game” has commenced.

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