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U.S. Govt. Should Stop Meddling in the Oil Market

The U.S. Government Should Stop Meddling in the Oil Market


July 1, 2005
by Ivan Eland
From: http://www.independent.org/newsroom/article.asp?id=1532

U.S. national security bureaucracies, some members of Congress, and their special interest supporters are eagerly demonizing the next “insidious” enemy: China.

Hawks and protectionists have seized on a bid by the primarily state-owned China National Offshore Oil Corporation (CNOOC) to take over California-based Unocal Oil. They allege that China could use the acquisition to meddle in oil pricing or even withhold supplies from the United States. U.S. officials have admitted heartburn over a communist-run corporation owning a major U.S. oil company.

But ironically those communists—now in name only—are trying to teach U.S. government bureaucrats and their protectionist pals in the “land of the free and the home of the brave” something about economic freedom and unfettered markets. According to Chinese Foreign Ministry spokesman Liu Jianchao, “The economic cooperation between China and the U.S. serves the interests of both sides. The bid by CNOOC for Unocal is a normal commercial activity between enterprises. We think that these commercial activities should not be interfered in or disturbed by political elements.”

The U.S. national security bureaucracies, dependent on public fears of oil shortages or high prices to maintain the flow of tens of billions of dollars into their agency coffers, have long had a vested interest in ignoring the fact that the worldwide oil market would function well without their meddling. For example, the key producers in that market, Saudi Arabia and the other oil-rich states surrounding the Persian Gulf, actually need to export their oil more than the West needs to buy it. Most of them have little else to export to earn much-needed foreign exchange. These producers have few incentives to withhold supplies from the United States or anyone else. Even if they did, the United States would buy oil from other oil producers around the world and the embargoing Persian Gulf country or countries would have to sell to the former customers of those other producers—that is, the market would simply reorder as it did during the OPEC oil embargo against the United States and the Netherlands in 1973. Furthermore, the producers know that if the price of oil goes too high, the demand for their product could be permanently damaged by new energy technology and alternative fuels then made economical. Thus, in the long-term, even the Persian Gulf oil heavyweights have far less market power than is attributed to them by the conventional wisdom.

If the market power of the Persian Gulf producers is restricted, that of a Chinese-owned Unocal is miniscule. In fact, Unocal’s total petroleum production is equivalent to only a small portion of U.S. consumption. The Chinese government wants Unocal’s oil fields, which are mainly in Asia (70 percent) and the Caspian Sea, to provide energy security for an accelerating economy. (Ironically, if the governments of Asia and the Caspian Sea had originally blocked Unocal’s investments in their countries for “national security” reasons, Unocal might not be as seemingly important to the U.S. government now.) The global oil market makes the Chinese governmental pursuit of energy security unnecessary, and the United States shouldn’t fall into the same quixotic quest.

Even if China decided that all of Unocal’s production would be exported back to China, this decision would reduce Chinese purchases from other world producers and thus free up oil to sell to Unocal’s former buyers. Thus, the world oil market would again reorder with no effect on price.

If the Chinese takeover of Unocal is blocked with a bogus “national security” justification, the world will merely see an attempt by the U.S. government to unfairly help Chevron, a U.S. company that was outbid by CNOOC in the Unocal takeover attempt. Such government meddling in a U.S. market traditionally seen as free by world standards could result in a chilling of foreign investment, which is important for U.S. economic prosperity. As indicated by CNOOC’s share price on the Hong Kong stock exchange, the market is already predicting that the U.S. government will stop the company’s acquisition of Unocal. Let’s hope the market’s prognostication is wrong.

*************

Ivan Eland is a Senior Fellow at The Independent Institute, Director of the Institute’s Center on Peace & Liberty, and author of the books The Empire Has No Clothes, and Putting “Defense” Back into U.S. Defense Policy.

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