Protectionist Capitalists vs. Capitalist Communists

Energy security and the Senate's Chinese puzzle

It's a little ridiculous when the Chinese Foreign Ministry lectures the U.S. Senate on the principles of free-market capitalism. But that's what happens when the Senate steps in to block an international oil trade, providing the lower bidder with the advantage.

Last month, Unocal board members chose Chevron's $17.1 billion bid as its recommendation to shareholders (voting later this August) over the higher $18.5 billion offer from China National Offshore Oil Corp. (CNOOC). Though Chevron did up the ante by $1.1 billion in the final hour, for months beforehand it remained the sweetheart bidder over a company whose ties to the Chinese government raised concerns about "our national interest."

With troops fighting abroad and oil prices rising at home, CNOOC's bid piqued considerable Congressional anxiety about national energy security, prompting a resolution to block the deal and press the president to exercise his statutory veto power over the sale on national security grounds. The Chinese Foreign ministry threw a curve ball back in a high-handed fax:

We demand that the U.S. Congress correct its mistaken ways of politicizing economic and trade issues and stop interfering in the normal exchanges between enterprises of the two countries.

The Senate's melee with CNOOC's bid for Unocal was based on "concerns about US jobs, energy, production and energy security." But the reasoning hasn't hit bedrock yet. Unocal's piddling oil production is hardly vital to U.S. energy security. Further, CNOOC pledged in advance to keep its products as a resource within U.S. borders and markets. As for those concerned with outsourcing, it is CNOOC that intends to retain jobs while Chevron plans to downsize. And what of the "unfair advantages" CNOOC accrued under the wings of the PRC? The terms of the loan CNOOC acquired to bid for Unocal require the capital to be paid within two years by selling Unocal stock, with interest. Its parent firm has never been subsidized by the PRC.

Senators wondered "whether a CNOOC purchase of Unocal would enable the Chinese government to influence or manipulate oil prices and supplies." But as Jerry Taylor of the Cato Institute told the U.S. House of Representatives in his testimony on CNOOC's capacity to endanger U.S. security, "America's vulnerability to oil supply disruptions is primarily related to how much oil we consume, not where the oil we consume happens to originate."

The Senate's paranoid reaction is likely only the first of a series in a diplomatic war between protectionist capitalists and capitalist communists. The quest for energy security is just getting underway, and statistics on international oil resources can be unnerving. Production is already peaking or declining in most non-OPEC countries. Exxon expects production to peak in the next five years, even recommending that the U.S. being increasing conservation of its oil supplies. And the Department of Energy's 2004 analysis states that the U.S. is using oil three times faster than it can establish new sources. But even given these fears, working feverishly to retain a small domestic oil producer is not going to stop the drain on supply.

When oil imports constitute half of U.S. trade deficits, it would seem halting policies that encourage dependence, accelerate fuel-consumption, and retard the evolution of market-driven solutions might be a first step. The government currently insists on trying to stimulate economic growth by coddling large U.S. oil companies and obfuscating high gas prices from consumers.

Tax breaks to the oil industry are consciously designed to make domestic oil companies appear more competitive. Oil companies typically pay an income tax of 11 percent, well below the 18 percent non–oil industry standard. Federal and local governments both spend millions in building infrastructure, and harnessing research and development knowledge used by the oil industry.

All this manipulation has the happy result that U.S. consumers pay less than half as much at the pump as consumers in other developed countries. But we end up with an energy economy that actively discourages innovation. The low hanging fruit here, to borrow Richard A. Epstein's analogy, is to stop distorting the market to encourage overconsumption, and start passively encouraging the market for alternatives.

The hullabaloo about CNOOC and Unocal only highlights the irony of U.S.-China foreign policy. We encourage a mutually-beneficial market-orientated PRC, but worry they may surpass us. An open door to Chinese markets has long filled the dreams of U.S. business, but we'd prefer if their 1.3 billion citizens didn't compete with our labor market.

If we're really interested in addressing these "national security" issues, we should re-examine oil subsidies, and encourage the world's budding capitalists.