This earlier post addressed the folly of developing a mercantilist governmental policy in response to the China National Offshore Oil Corp.’s hostile takeover bid for Unocal, which had previously accepted Chevron Corporation’s friendly bid for the company. In this OpinionJournal op-ed, CNOOC, Ltd. chairman and CEO Fu Chengyu takes up that line of thinking in arguing that CNOOC’s bid is actually good for American business interests and poses no threat to those those interests or American security.
In the meantime, in this post, Brad Stetser, senior economist for the boutique firm Roubini Global Economics, has been thinking about the CNOOC bid in the context of the amount of foreign assets that the Chinese accumulate each month by exporting more than they import. Mr. Stetser estimates that the value of those assets is around $20 billion, which is more than the $18.5 billion that CNOOC is bidding for Unocal. Thus, Mr. Stetser notes that it’s a tad absurd to worry too much about the Chinese buying one second tier oil & gas company when the real issue is that China has become the largest creditor of an increasingly leveraged U.S. economy. Stated simply, it doesn’t make sense to object when Communists want to buy U.S. companies, but sell away when the same Commies offer to buy U.S. debt.

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Sebastian Mallaby joined the Washington Post editorial page in 1999 after 13 years with The Economist magazine, and is the author of The World’s Banker: A Story of Failed States, Financial Crises, and the Wealth and Poverty of Nations (Penguin Press 2004).
In this fine piece regarding the China National Offshore Oil Corp.’s hostile takeover bid for Unocal (previous posts here and here), Mr. Mallaby points out that it’s usually a bad idea to prevent a foreign company from overpaying for an American company:

Does it matter if China owns U.S. companies? Japan went on a corporate spending spree in the 1980s, and the chief victims were not Americans, as the protectionists predicted, but the Japanese themselves. The Japanese paid inflated prices for Hollywood studios and landmark New York buildings. The exiting American owners made off with a nice profit. The Japanese got burned.
The Unocal bid has triggered the same muddled complaining that attended those Japanese takeovers. The protectionists say the Chinese want to pay for Unocal with cheap loans from their taxpayers, just as Japanese corporations were once denounced for accessing cheap capital from servile banks. But this means that China’s taxpayers are offering sure profits to Unocal’s shareholders. Admittedly, it also means that Chevron’s shareholders stand to forgo a business opportunity, but then that opportunity may not have paid off. From the view of U.S. economic interests, this is a net plus.

Read the entire piece, and also contemplate Exxon CEO Lee Raymond’s thoughts on Chevron’s earlier bid for Unocal:

Q: What do you think of ChevronTexaco’s decision to acquire Unocal?
Mr. Raymond: I can never remember an industry consolidating at high prices. But I can remember an industry consolidating at low prices.
Q: Some people think prices will keep going up.
Mr. Raymond: Maybe. I’ll bet they’ll be lower at some point.

Finally, in pointing out that trade restrictions against China make little sense, Lawrence Kudlow notes in this Washington Times op-ed:

If a store is selling quality products at low prices, why would anyone want to shut it down?

By the way, courtesy of John Wagner, Mark Palmer — who was Enron’s head public relations spokesperson as the company slid toward bankruptcy — is CNOOC’s public relations point person in its bid for Unocal.

Cnooc Ltd., China’s third-largest oil company and it’s major explorer of offshore oil and gas, yesterday made an unsolicited $18.5 billion cash bid for El Segundo, CA.-based Unocal Corp. The bid is attempting to scuttle the earlier $16.5 billion bid that San Ramone, CA.-based Chevron Corp. made for Unocal in April.
If successful, Cnooc’s bid would be the largest foreign acquisition ever attempted by a Chinese company and would be the first time that a Chinese and U.S. company have competed in a takeover battle. Cnooc had been considering making a bid for Unocal in April, but backed off at the last minute.
Inasmuch as a good case can be made that Chevron’s bid was over-priced, Cnooc’s offer for Unocal reflects that China’s government (about a 70% owner of Cnooc) will pay a high price to gain direct control over more energy assets to fuel its booming economy. Nearly half of Unocal’s reserves — the oil and natural gas equivalent of about 1.75 billion barrels — consists of natural gas in Asia. Cnooc is offering $67 a share for Unocal, and would have to pay Chevron a $500 million breakup fee and assume Unocal’s $1.6 billion in debt.
Although Cnooc’s bid will undoubtedly raise political concerns in Washington, prominent U.S. executives advised political interests to remain calm. The Wall Street Journal reported that Exxon Mobil Corp. Chief Executive Lee Raymond said it would be a “big mistake” for the U.S. government to block Cnnoc’s bid. “You have to have free trade. If you start to put inefficiencies in the system, all of us eventually pay for that.”

ChevronTexaco Corp. announced today that it is dropping the venerable “Texaco” part of its corporate name and shortening its name to Chevron Corp., which was the name of the company before before the company merged with Texaco three and a half years ago. Don’t worry, though. That bright Texaco star will still grace the local gas station as Chevron plans on continuing to use the Texaco brand to market gasoline.
Chevron has been in the news recently with its proposed acquisition of Unocal Corp for about $17 billion, which is subject to shareholder and regulatory approval. Chevron’s stock will continue to trade on the New York Stock Exchange under the “CVX” ticker symbol that was adopted after the Texaco takeover.

San Antonio-based Valero Energy Corporation announced early today that it would acquire refiner Premcor Inc. for $6.9 billion in cash and stock plus the assumption of about $1.8 billion of debt, which will the San Antonio company the largest refiner of crude oil in North America.
The deal — which is subject to regulatory approval in the already heavily consolidated refining industry — would give Valero total refining capacity of 3.3 million barrels a day, making Valero’s refining capacity more than that of Exxon Mobil Corp. in North America. The deal gives Premcor shareholders an initial premium of about 20% based on the recent 30-day trading range of Premcor’s stock price.
Valero has been on an refinery acquisition initiative for almost a decade. Beginning in 1997 when it owned only one refinery, Valero has made seven acquisitions and, if the Premcor deal is approved, will have 19 refineries. Valero already became the largest independent refiner in North America in 2001 when it bought Ultramar Diamond Shamrock Corp. for $4.03 billion plus the assumption of $2.1 billion in debt, and the 5,000 retail gasoline outlets involved in that acquisition gave Valero a large retail presence. The Premcor purchase would give Valero four additional U.S. refineries and bring its annual revenue to about $70 billion.
The deal highlights a startling turnaround that has occurred in the refining industry over the past several years. Since the big shakeout in the oil and gas industry that occurred in the mid-1980’s, the refining industry struggled for over a decade. Investment in new refineries slowed to a trickle for a combination of reasons, including overcapacity, inadequate return on investment, oppressive environmental regulations and local political opposition to new and more efficient facilities. As a result, most people do not realize that the last new plant to be built in the U.S. was in 1976, that the number of refineries in the U.S. has declined to 150 at present from 325 in 1981, or that refining capacity for crude oil has declined from about 18.5 million barrels a day to about 17 million barrels per day over the past five years.
Accordingly, while worldwide demand for gasoline has been rising dramatically over the past several years and refiners have struggled to keep pace with increasing demand, the refiners’ limited capacity and low inventories have resulted in substantially improved margins, which is the difference between the price that the refiners’ receive for their product and the price that they pay for crude oil.
Thus, when you hear complaints about high gasoline prices, recognize that the relatively high price of oil is only one component of the problem. Lack of refining capacity is at least as big a reason for the problem, and making it difficult to construct new refineries only ensures continued high gasoline prices.

This New York Times article — entitled The Troubled Oil Company — reviews the Venezuelan dictator Hugo Chavez’s mismanagement of Houston-based oil company Citgo, which is owned by Petroleos de Venezuela, the Venezuelan national oil company. Over the past two years, virtually every high-ranking Citgo executive has resigned, including the refining chief, the chief financial officer, the head auditor, and the marketing director. Here is a previous post on Mr. Chavez’s mismanagement of Citgo.
Although the Times article about Citgo and Mr. Chavez is interesting, it’s always funny how the Times analyzes a government’s mismanagement of a big oil business. As late as 1999, Venezuela was the U.S.’s largest foreign supplier of oil, but then Mr. Chavez took over, began establishing close friendships with anti-business types such as Fidel Castro, and generally started mismanaging the Venezuelan economy. By 2003, Mr. Chavez had cut its exports to the U.S. by 22% and was threatening to cut off oil exports to the U.S. entirely if the U.S. government doesn’t stop meddling in Venezuelan affairs.
Now, if the foregoing were occurring in Saudi Arabia, then the Times would be handling it as a major foreign policy story of impending doom. However, when a crackpot socialist and Castro admirer mismanages oil exports, the Times treats it as a typical business story.
Which is exactly the way the story should be handled. Mr. Chavez’s management of the Venezuelan economy has been horrific, albeit aided by high oil prices. But U.S. oil imports as a percentage of GDP are relatively small, about $132 billion in 2004 compared with a about a $11 trillion GDP. That’s about 1%, folks. Thus, if Mr. Chavez chooses to sell us less oil, hopefully the U.S. government shrugs, we replace Venezuelan oil with oil from the numerous other markets, market prices adjust, and we get on with getting to work.
Besides, if the U.S. government is going to take a hard line with an oil exporter, don’t you think that the government should take that stance with the country from which we import the most oil? Oh, and what country is that?
Answer: Canada.
Hat tip to Bryan Caplan for info on the Venezuelan oil imports.