Dealing with the Unocal deal

The Chinese bid for an American energy company forecasts a future that the Bush White House is ill-equipped to handle.

By Aaron Kinney
Published June 30, 2005 9:25PM (EDT)

It's been a week now since China National Offshore Oil Company (CNOOC) announced an $18.5 billion hostile takeover bid for Unocal, the energy company based in California, and the debaters have taken their positions. Patrick Buchanan, not surprisingly, is violently clanging the alarm bell. His fears for America's national security are shared by 41 members of Congress who sent a letter to President Bush, urging him to give the proposed deal close scrutiny. In response to those who might lecture America on the rules of free trade, some commentators have pointed out that CNOOC was able to submit such a high bid ($2 billion more than the rival bid from Chevron Corp.) because it is subsidized by the Chinese government, which owns 70 percent of the company, allowing China National to operate beyond the strictures of the open market.

To allay American concerns, China National CEO Fu Chengyu has indicated that, if Unocal shareholders approve the deal at a meeting on Aug. 10, he will retain all of Unocal's American employees. Chengyu also pledged not to divert to China the oil and gas supplies that Unocal now sells to America; and the company has stated that it might be willing to divest itself of Unocal's North American assets. There is additional concern about the fact that Unocal has rights to advanced deep-water drilling technology and does business in strategically important regions of Central Asia. (Unocal, of course, was the company that wanted to build a natural gas pipeline through Afghanistan until the Taliban took over and the business vibe got scary.)

Whatever happens at the shareholders' meeting, the bid for Unocal is a sign of what is to come between China and the United States. As the world's oil reserves dwindle, China and America, the largest energy consumers in the world, will wind up competing for the Earth's remaining energy resources. Maybe it won't get ugly. But if the human race has demonstrated anything over the course of history, it's that when it comes to conflict, nations tend to settle things the hard way. As Jared Diamond pointed out in his recent book, "Collapse: How Societies Choose to Fail or Succeed", civilization-extinguishing conflicts have typically been the result of fatal shocks to the supply of vital resources, whether through accident or mismanagement.

Which brings us, as usual, back to President Bush, who's providing us with an object lesson in how not to situate the U.S. vis-`-vis China, both militarily and economically. In the big picture, international terrorism and the potential for China to grow militant towards the U.S. represent the two gravest threats to American national security in the 21st century. It would make sense then to avoid tying ourselves down in unnecessary wars and destabilizing critical regions like the Middle East. Had we acted with precision in response to Sept. 11th, we would have invaded Afghanistan and then stayed there in full force to finish the job, eliminating Osama bin Laden and al-Qaida's mountain redoubts. Instead, Afghanistan is still dicey and our military is overextended in Iraq, precluding major combat operations elsewhere.

Economically, the Bush administration's "don't tax but also spend" policy of supply-side tax cuts has caused America's budget surpluses to veer sharply into the red, generating legitimate concern of a third-world style financial meltdown. China is loaning us money by buying our bonds. If China wants to trigger a financial crisis here in the U.S., all it has to do is demand that we pay our debts and pull its money out of the American market. One factor preventing China from doing that is the amount of money American consumers spend on Chinese goods, which those consumers wouldn't be able to do in the midst of a depression. Still, America is in an untenable financial position. The U.S. can't afford to go deeper into debt while floating a costly war in Iraq and figuring out how to pay for Social Security and rising health-care costs.

China National's bid for Unocal may come and go, but the competition for resources between the U.S. and China is an ineluctable reality of the 21st century. But to manage that contest effectively will require a kind of practical problem-solving that the ideologically fixated Bush administration does not possess.

Aaron Kinney

Aaron Kinney is a writer in San Francisco. He has a blog.

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