China's purchasing power...

CNOOC's bid for Unocal is becoming reality.

Here's a snippet:

"China National Offshore Oil Corp. (CNOOC) has agreed to launch the biggest ever takeover offer by a Chinese group with a 19 billion dollar bid for US oil major Unocal, according to a report.

The decision to trump a rival bid for Unocal by ChevronTexaco was reached by CNOOC directors in a tense six-hour board meeting held in Beijing on Wednesday, The Financial Times said in its online edition."

Here's the initial post on this topic from 6 JUN...

Let's put ourselves in the shoes of Chinese leadership at the moment.

Your economy is growing at amazing rates, with so much unrealized potential that you shudder to think of the possibilities.

You look out at the world and realize, in your nascent economy, that you need as much oil as you can find (as the US had at its disposal through its unparalleled growth) to improve your country's standing.

What do you do? Because you run a government controlled economy, your government can amass private corporations (through the Chinese oil companies) of other countries and their oil resources, unlike your more democratic competition.

That's probably what you start trying to do, isn't it?

The other thing to remember is that your government is sitting on a centrally controlled currency with no debt (that you have to pay attention to...). The cash you have can be outlaid for just this purpose, because you have unanimity of purpose (the preservation of the Chinese state) unlike the other purchasing powers (which have a profit motive and will wait until it is fiscally rational to make such purchases of small oil).

On the other hand, your main competitors, the US and Europe, are in comparative fiscal and economic trouble, though the US economy is growing, its debt is quite cumbersome. While the US imports around half of its oil, as we saw from HO a couple of posts ago, if other countries start horning in to those supplies (especially if there IS NO MORE SUPPLY TO DIG INTO), prices spike, meaning it costs more because of the competition for that scarce supply.

This article today is symptomatic of what I fear is coming more and more around the bend.

Here's a quote:

"CNOOC Ltd. said Tuesday it remains interested in Unocal (UCL: news, chart, profile) , which is attractive to the Chinese producer because of its Asian assets. Chevron (CVX: news, chart, profile) is already in an $18 billion deal, as yet unapproved, to buy Unocal.

Shares in Unocal rose 1.1%, or 61 cents, to close at $58.10. Chevron stock lost 7 cents to close at $54.78.

CNOOC would likely sell Unocal's U.S. assets, as it's primarily interested in the company's fields in Asia, mainly in Thailand and Indonesia, said Oppenheimer & Co. analyst Fadel Gheit. Unocal's U.S. assets include about 500 million oil-equivalent barrels of proved reserves, which could generate close to $7 billion in cash proceeds, he said."

CNOOC said in a statement to the Hong Kong Stock Exchange that it was "continuing to examine its options with respect to Unocal. These options include a possible offer by the company for Unocal, but no decision has been made in this respect."

Whether or not CNOOC makes the bid for Unocal, this is a trend of consolidation that will continue.

Yes, some corporations, like Exxon-Mobil are sitting on $48B in cash, thinking about doing the same thing no doubt...buying up more and more oil that is close (Oh, Canada?) and easy to get here. But they're not doing it yet...whereas China is also making inroads with Canada and other potential suppliers. (Canada may well be the oil merchant of the future, remember that. Can anyone say NAFTA?)

Consolidation will be the key in the new oil economy. The large oils have no flexibility in supply, and with little new supply being found, all they can do is buy up smaller corporations.

The catch is that right now, China is winning the race and the US is losing it.

This is the geopolitical instability that peak oil causes. It's real. Get used to it.

Go to the postings for today

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If anyone's interested in China's policy to guarantee oil delivery and so on, the FT has some interesting articles in its latest special: China goes global - Asia Insight
The digital version is a bit funny, but check out pages 6/8/12/20/21.
Or read my paper about this when I'm done writing next week!

There's a lot happening in the region... Fascinating stuff.

Its funny to see china keep coming up time and time again, but I think we shall be seeing more and more of them as the years progress. They understand the gold standard something we forgot about. And its going to cost us plenty in the long run.

I think it is undeniable that in an era of a diminishing vital resource a command and control economy has an advantage that Adam Smith never anticipated.

The only way China will be stopped is by their own overshoot problems. This will likely be exacerbated if they try and follow anything resembling our consumption model.

"Everybody deserves a car in the driveway" is certainly an American ideal. And their other problems (population, resources, etc.) are much more acute than ours. Trying to emulate us in any fashion, especially as resources worldwide come under stress and decline, is perilous at best.

Remember, it's not just oil, although oil is the BIG economical driver today. There are other resources (fresh water, food, iron, uranium, bauxite, etc) that come into depletion play even if the world adapts to the oil problem.

The problem at it's simplest is the mtyhical "ever-expanding economy" and the way money works to force resource depletion.

no debt? only if you choose to ignore it!

"When China wakes, it will shake the world."
-- Napolean

J said "The only way China will be stopped is by their own overshoot problems. This will likely be exacerbated if they try and follow anything resembling our consumption model."

IMHO, they are following our consumption model and have a number of short-term strategies for solving their oil overshoot problems (but no long-term strategies, of course). These include

1) taking advantage of our unstable currency and debt and just outbidding us for the stuff - after all, they are now the world's largest manufacturing nation

2) by purchasing smaller oil companies with reserves (like UNOCAL as in this story)

3) deciding that south/central Asia is a lot closer to them than it is to us and forcing the hands (by covert threat) of the producers there

4) by persuading receptive leaders like Chavez in Venezuela to sell their oil to China

5) by paying bigger bribes to corrupt thirdworld despots for their oil than we do

There are some numbers about China's oil demand at Looming China oil output means import overdrive.

Have a better one.

PG said "This is the geopolitical instability that peak oil causes. It's real. Get used to it. "

Absolutely god damn right. See my remarks on "J on CERA/Yergins and the When? of Peak Oil"

Sounds like a better investment than those worthless IOU's that George Bush is peddling to them.

w -

They have no debt - China is the world's second biggest creditor nation. Ironically, they have loaned most of this to the U.S., the world's largest debtor nation.

We are the ones who are choosing (at least for the moment) to ignore our debt.

Roy -

We will never repay that debt, IMO. Amd many other economists believe this also.

j -

True, but China is not indebted - they just hold an "asset" that may be worthless.

And what better way to use that "asset" (Treasury bonds) than to buy something that does have a great deal of value (Unocal, for instance)?

The Chinese win on both ends - they increase their oil supply, and offload some of their (potentially worthless) dollars.

Roy has it - China is absolutely flush with dollars that may be literally worthless in five years.

Converting dollars to commodity holdings is unimpeacahble policy.

The larger the scale, the better. China has like what, 600 billion in dollar holdings?

A penny saved is a penny burned with US fiat currency.

China cannot solve its overshoot by continuing to rely on phantom carrying capacity any more than the USA can.

Why the anguish? Takeovers are an everyday feature of the free market. The possible take over of Unocal by a Chinese nationalised energy company is just another example. Moreover, businesses tend to be cosmopolitan: they owe allegiance to their shareholders, wherever located, not to countries - unless nationalised.

I think it was Lenin who said: "The Capitalists will sell us the rope with which we will hang them."

Several comments here that China (and Japan and other Asian countries) are blowing their brains out by buying U.S. treasuries. I doubt it. First, the U.S. will never default per se; however, they likely will default by inflating the currency at a greater rate than currently. So it will be a stealth default, similar to the debasement over the past 100 years (roughly 95%). Secondly, the Chinese and others are acting as the largest vendor financiers in history: they provide the capital to the U.S. so that interest rates remain low and the trade deficit is financed. With low interest rates, the cost of borrowing stays low, housing prices rise, consumers feel flush and keep buying imported goods from China! A virtuous circle.

The salient point is that the Chinese, Japanese, Koreans, etc. have large savings pools. With these savings pools they can afford to 'invest' in U.S. treasuries, and still have a pile of dough left over. With the remaining savings, guess what, they're buying homes, cars, and doing more and more travelling, all of which contribute to the explosion in fossil fuel prices. I think it's the massive savings in these countries (including India, Russia, etc) that will drive the energy prices in future, not the profigate ways of Americans and Europeans.

I wouldn't be so commending of command control economies. That is how the Soviet Union came to grief. China probably learnt that lesson and is now moving away from that old model by allowing more private enterprise, albeit under a more watchful gaze. Their goal, like here is a mixed economy model.

As for debt, sure they may have no open debt, but the Bank Of China is carrying a lot of bad loans just now since their stock market went south four years ago. The People's Bank has been inflating their currency like crazy to extend credit for the current boom. It can only end in tears and then we will question the glories of a centrally controlled economy which lacks the checks and balances of freely accessible buyers and sellers.

Having said that, I have said before that more nationalised economies will happen as a result of Peak Oil. Not necessarily because this is the most efficient route but because that is the way human nature works in a crisis.

For a country that is supposed to have a lot of potential oil reserves (CERA report), why they would want to buy such a small company (1.7 Gb of oil)?

khebab -

I think the answer to your question is self-evident.

Oil will become more pricy and scarce long term. China knows how overextended we are economically, and is worried about the long term future of the dollar. They have lots of dollars - what is a good thing to have instead?