Trust the market in sale of Unocal

July 27, 2005|By Antony Page

A STATE-CONTROLLED Chinese company, CNOOC Ltd., is bidding against Chevron Corp. to buy Unocal, America's eighth-largest oil company.

This is the biggest foreign takeover attempted to date by a Chinese firm. After Lenovo Group's recent purchase of IBM's laptop business and Haier's attempt to buy appliance icon Maytag, this latest Chinese offer has alarmed many Americans. Although many demand government intervention, this should be settled the American free-market way: Let the shareholders decide.

In the last month, the House approved a nonbinding resolution asserting that a sale "would threaten to impair" U.S. national security. It also overwhelmingly passed another measure that would prevent the Treasury Department from using its resources to approve the takeover. On Monday, a House-Senate conference committee approved a measure as part of a broad energy bill that would require a special study of the transaction, and would delay it at least 141 days.

CNOOC filed a notice July 1 with the little-known Committee on Foreign Investment in the United States, or CFIUS, requesting a review of the transaction. CFIUS, an interagency department chaired by Treasury Secretary John W. Snow, advises the president on whether to block foreign takeovers on national security grounds. National security is not defined, but oil is clearly a requirement for the "capacity of domestic industries to meet national defense requirements.

But blocking takeovers is intended only as a last resort; CFIUS has blocked only one of more than 1,500 transactions it has reviewed since 1988.

Congress, not for the first time in trade matters, is wrong. There's no reason to overreact. Unocal is actually, dare one say it, trivial. Its total domestic production is less than 1 percent of U.S. oil consumption. Its most valuable assets are in Asia. Unocal doesn't even make the top 40 of world oil and gas producers.

Even if Unocal were bigger, oil and gas are fungible global commodities, sold to the highest bidder. If a terrorist attacks a Saudi Arabian oil field, buyers pay more for Texas supplies, too. If Unocal's production were diverted to China, the oil and gas from other suppliers that would have gone to China would be freed for sale. After all, buying Unocal is not going to increase overall Chinese demand for energy. Besides, according to experts, the more important risk to U.S. energy security is not supply but refining capacity. Refining capacity is tapped out, and can be increased only slowly.

Moreover, the United States cannot preach free trade and investment out of one side of its mouth but refuse foreign investment from the other.

China is only the latest of many countries to take an interest in U.S. energy properties. Companies, state-owned and otherwise, from Russia, France, Venezuela and Saudi Arabia, among others, have been purchasers. Last year, nearly 14 percent of domestic crude oil was produced by non-U.S. companies.

Understandably, China is concerned about special - read discriminatory - treatment. Conceivably, it could retaliate against U.S. joint ventures in China, or other countries such as Mexico might be encouraged to maintain their own restrictions on foreign ownership. This is one reason why Lee Raymond, CEO of ExxonMobil, says CNOOC's bid should not be blocked.

Politicians normally oppose mergers because of the risk of job losses. But CNOOC has pledged to retain "substantially all" of Unocal's employees. In contrast, Chevron will try to generate hundreds of millions of dollars in cost savings, many through layoffs. Blocking CNOOC's bid may cost U.S. jobs.

Some object to the implicit Chinese government subsidy of the bid. But a wealth transfer from Chinese taxpayers to Unocal shareholders (and then to the IRS through increased capital gains taxes) is probably good for the U.S.

Chevron has offered Unocal's shareholders cash and stock worth more than $17 billion. CNOOC's offer is $18.5 billion cash and may increase. Unocal's shareholders will vote on the Chevron offer Aug. 10. If Unocal's shareholders prefer Chevron's bid, CNOOC can't complain about the owners' decision.

Attempting to curb China's energy needs by preventing the CNOOC bid will not promote world stability; rather, the opposite. As Democratic Rep. James P. Moran Jr. of Virginia notes, "If they don't buy American oil companies or Western oil companies ... where are they going to go?" He suggests China doing business with Iran as one undesirable answer.

Worse, a country that's unsure of its energy security may invade an energy-producing country. Given the alternatives, let's not prevent China from following the free-market way.

Antony Page is an assistant professor of law and John S. Grimes fellow at Indiana University School of Law, Indianapolis.

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