Open markets, closed minds

Crude oil prices have hit the roof thanks to China8217;s ravenous appetite. As of 2005, China, not Japan, is the world8217;s second largest importer of petroleum. The US is still first on the list. Confronted with this fact, China8217;s leaders have been hunting for fresh assets to add to their reserves. This is the first time, however, that China has clashed directly with the US.

Fu Chengyu, CNOC8217;s chief executive, tactlessly declared that the deal 8220;is good for America8221;. Given his graduation from the University of Southern California and his experience of working with Phillips Petroleum, Fu must have known this was an ironic twist to the famous slogan 8216;8216;What is good for GM is good for America8217;8217;!

The Chinese firm tried to douse the fires with promises of retaining 8220;most8221; of Unocal8217;s workers as well as selling all its American-produced oil within America. This cynical ploy fools nobody. As even CNOC admits, Unocal8217;s domestic oil accounts for under 1 per cent of American consumption. The company even sold its refining and retail operations as far back as 1997. The real prizes lie elsewhere. The bulk of Unocal8217;s oil comes from sites outside the US 8212; the Gulf of Mexico and the Caspian Sea area to name but two. Nearer home, Unocal is a major player in exploring potential oil resources in Bangladesh, Myanmar, Indonesia and Thailand. Control of Unocal would give the Chinese government access to petroleum well away from the continental US at least as far as the Asian sites are concerned. As a bonus, the Chinese would acquire Unocal8217;s deep-sea technology, which can be converted to military purposes.

The beauty of the Chinese bid is that they are playing by American rules. Mergers, takeovers and hostile bids were raised to the level of a fine art by the barons of Wall Street to the applause of the politicians on Capitol Hill. How will the engineer react when the threat arises of being hoist with his own petard? Contrariwise, can the US stand by, wringing its hands as one of the castles of American energy security passes into Chinese hands? What sense does it make to spill blood and treasure in the sands of Iraq, yet allow the Chinese to wrest control of America8217;s backyard?

There is talk of 8220;ingratitude8221;. The US granted China 8216;Most Favoured Nation8217; status without much quibbling. But reciprocating the favour is low on the Chinese agenda.

China already has enormous leverage over the US. It holds roughly US 175 billion worth of American treasury bonds. They can afford it easily enough given that the American trade deficit with China is now over US 160 billion. Once, the US national debt didn8217;t seem to matter so much because it was money that Americans owed to themselves; today it is money that they owe to the Chinese and the Japanese. In April, the Chinese went so far as to say the US must improve its own fiscal discipline if it wants to curb the trade deficit.

The logic is on the side of the Chinese. Why is it perfectly acceptable for China to spend its dollars on treasury bonds when the same money is unwelcome if it wants to buy a private company? After beating the drum of open markets everywhere, is the US prepared to shut shop when it is American firms that are at risk?

In 1652 the Dutch and the English went to war after bitter commercial squabbles. In distant America the colonists of Manhattan resolved to surround their city with a stockade. The path that spread along this is now the world renowned Wall Street. It is worth remembering that the wall was built not to keep the Native Americans out but for protection against a rival trading power.

No wall, however, can be stronger than its defenders. If most analysts take the staunch nationalist line, CNOC has found allies in some Wall Street barons. The Marxists in Beijing probably counted on that. After all, Lenin himself laid down the dictum, 8220;When we want to hang the capitalists they will all come offering to sell the rope!8221;

As I write, the news is rolling across my browser that the Left Front adamantly opposes the BHEL sale. In one of history8217;s ironies, both the American Right and the Indian Left are raising the spectre of national security to ward off globalisation8217;s consequences.

I leave you with two questions. First, could it have been India rather than China that was as strategically placed if we had initiated economic reforms earlier? Second, if China8217;s desperation for petroleum has resulted in an explicit challenge to the US how far will it go when battling India for oil and water?