 By JAMES K. GLASSMAN Scripps Howard News Service August 10, 2005
By misleading and frightening the U.S. public, you've managed to erect enough obstacles to force the Chinese oil company CNOOC to withdraw its bid for a tiny U.S.-based oil company called Unocal. Why is the strongest nation in the world - a country with an economy larger than its next five competitors combined - scared about the takeover of a truly minuscule American firm? Loss of will, lack of confidence, ignorance? I am not really sure, but the damage has done. The big losers are the American people, who, if this trend continues, will surely face higher prices, higher interest rates and a less dynamic economy. The only winners are the shareholders of CNOOC, whose stock quickly rose 5.5 percent on news that the offer was being scuttled. The reason is simple: CNOOC was overpaying. In my view, if the Chinese want to hand Unocal's shareholders too much money - the way that the Japanese did when they went on a U.S. real estate shopping spree in the 1980s - we should have enthusiastically said, "Yes, go ahead!" Instead, we cowered in our bunker. Unocal in 2004 produced just 70,000 barrels of petroleum a day. That's less than one-half of one percent of U.S. consumption and less than one-tenth of one percent of world consumption. Only one-third of Unocal's reserves and none of its refineries are in the U.S. Even if CNOOC decided to ship all of Unocal's North American oil and gas to China - an absurd proposition when a market for it exists right here - the loss of U.S. supply would be trivial. Global supply would be unaffected. CNOOC oil, in this unlikely case, would substitute in, say, Shanghai, for oil currently bought from other countries. Meanwhile, the U.S., deprived of Unocal oil, would purchase the missing supply from any of dozens of providers around the global. Prices would be unaffected. How does the derailing of the CNOOC bid hurt the U.S. economy? Any disruption of trade - in goods, services, people or capital - necessarily raises costs and slows economic growth. That was Adam Smith's lesson in 1776, and it's still true today. But there's a specific problem for the U.S. when we discourage foreign companies from buying our corporate assets. In his new book, "The Future for Investors," Jeremy Siegel of the Wharton School of Business looks at changing U.S. demographics - our shortage of workers supporting retirees - and concludes that it will impossible for U.S. living standards to rise on the backs of domestic workers alone. His solution is that during this period of demographic imbalance, the U.S. needs to sell assets to developing nations, which have a growing population of educated workers. This phenomenon is, of course, already occurring for certain financial assets - that is, Treasury bonds. But Siegel writes that fast-growing Asian countries, especially China, will shift from bonds to stocks and will "save equity prices from sinking once all the baby boomers retire." In short, we need China to buy, not only our goods, but, more important, pieces of our companies. That will raise stock prices, a boon to the majority of Americans. Currently, China's investment in Western business is tiny. Meanwhile, U.S. investment in China is rising. Take Chinese oil companies. Berkshire Hathaway, Warren Buffett's company, has a one-eighth interest in PetroChina. ExxonMobil owns one-fifth of Sinopec. Those two firms, plus CNOOC, have all launched successful Initial Public Offerings in the U.S., selling shares to American investors. China is moving toward ending state ownership of businesses and parts of businesses, but it needs to move quicker. It's wasteful for government to allocate capital, substituting political decisions for business choices. Indeed, that is what both countries have done in the CNOOC case. China was about to overpay for an oil company in order to secure resources that its companies could, in the normal course of business, buy on the open market. Meanwhile, U.S. politicians substituted their errant, hysterical judgment for that of investors and managers. Certainly, Congress is right to stop certain sales. We shouldn't sell Lockheed, for example, to the Iranians - or to the Chinese for that matter. But Unocal? How pathetic, childish and cowardly! This is not the behavior of a courageous nation founded on political and economic freedom.
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