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News Update
06-08-05, 03:02
Chinese Power Play

The sale of Unocal isn't just about dollars & cents

by Tom Donnelly & Melissa Wisner

07/29/2005 4:00:00 PM

The melodramatic saga swirling around the sale of U.S. energy company Unocal has had a strong damsel-in-distress flavor about it: Will the fair maiden be rescued by Chevron Texaco-the nominally American knight in shining armor-or be spirited away by the Black Knight of Beijing, aka the China National Offshore Oil Corporation? The final chapter will be written by Unocal's shareholders on August 10 (CNOOC is reportedly on the verge of dropping its bid), but the tale thus far has been deeply revealing of the schizophrenia infecting American views of China and its "rise." Casting the story as a simple allegory obscures the real moral. There are a number of reasons to be concerned about the Chinese acquisition of Unocal, just not the ones that have made headlines.

Protectionist types have framed the sale as an issue of American economic nationalism. CNN's Lou Dobbs has made the Unocal story a feature of his ongoing "Red Storm" coverage, which is China-bashing of a very persistent and high order: "[T]he Chinese state's mission is clear," he declared July 15, "whether we choose to continue our ongoing naiveté or awaken to reality: It seeks to control the world's natural resources, become the global manufacturer of choice, and rapidly build its military power to rival that of the United States."

The laissez-faire lobby has circled the wagons around free-market theory. Oil, we're all supposed to remember, is a fungible commodity, eternally and simply subject to the market's laws of supply and demand. Jerry Taylor of the Cato Institute declares that "Only a naval blockade could prevent America from buying all the oil it needs from international markets." The Economist has summed up the CNOOC controversy in two words: xenophobic protectionism.

But free-traders are missing important geopolitical issues brought into play by the potential sale of Unocal to CNOOC. There's no direct danger to the energy security of the United States, nor is there anything like a Chinese plot to control the world's natural resources-a strategy, by the way, that we can only hope Beijing might pursue, given its futility. The Chinese are about to develop the same fossil fuel jones that Americans have; the Communists in Beijing see their hope of political survival in getting their people off their bikes and into automobiles. That said, it's equally clear that China is implementing a set of energy and natural-resource policies designed to enhance its influence in East Asia but also globally, with the effect (and almost certainly the intent) of undermining the United States.

Unocal is small when measured against the Exxons and the Chevrons; it's the ninth-largest American energy company. But it has some very specific strengths. To begin with, Unocal is an important presence in Indonesia, especially in liquefied natural gas (LNG). Indeed, says Fareed Mohamedi, chief economist at PFC Energy consultants, "Unocal is an LNG play." Unocal is developing Indonesia's deep-water resources-deep-water drilling is one of the company's specialties-and aims to supply Indonesia's Bontang LNG plant, the world's largest, with 40 percent of its requirements over the next decade.

Gas from Indonesia in general and the Bontang plant in particular is a crucial source for East Asian energy needs. As in the United States and other pollution-conscious industrialized states, liquefied natural gas provides an increasing measure of fuel for electrical power. Most of the Indonesian product goes to South Korea, Japan, and-wait for it-Taiwan. In sum, Chinese possession of Unocal's Indonesian assets would be deeply worrisome to America's democratic allies in the region. It would give China another bit of vital leverage in its intimidation campaign against Taiwan, which gets about 60 percent of its LNG from Indonesia.

As important, CNOOC's acquisition of Unocal would give Beijing a heightened status in Jakarta. The weak Indonesian government, though stressed by Islamic insurgents and tsunami recovery, remains a rallying point for Southeast Asians struggling to deal with increasing Chinese power. Indonesia-with little help from the Bush administration-has been intermittently working to limit Chinese dominance of ASEAN, the Association of Southeast Asian Nations.

In sum, the Unocal deal does have strategic effects in the region. As Marvin Ott of the National Defense University puts it, "It will not go unnoticed in the region that China-assuming China were successful with regard to Unocal-now has become the owner of major gas and oil reserves in the region. It will become yet another step in a comprehensive strategy, beautifully conceived and implemented, to establish Chinese presence and influence" throughout Southeast Asia.

One can perhaps see the effects of China's commodity strategy in Australia. In October 2003, CNOOC signed a deal to buy a share of, and jointly develop, the Gorgon Project, the largest gas field ever discovered in Australia. The result has been to complicate Australian foreign policy-Canberra suffers from the same engagement/containment schizophrenia rampant in Washington. Leading the Australian panda-huggers is Foreign Minister Alexander Downer, who was famously unsure if the venerable ANZUS mutual defense pact extended to a defense of Taiwan. In the wake of an earlier Downer trip to Beijing, correspondent Catherine Armitage of the Australian commented that "one of the aims of the trip was to send a message to China that the balance [of power] is shifting in its favor." Obviously, China cannot hope to employ this strategy to fully divide the United States and Australia, whose common security interests in the war on terror will be all but impossible to overcome, but Beijing undeniably has been successful in staving off greater U.S.-Australia cooperation.

One more Unocal effect, this time from the Caspian Basin and the world of Central Asian politics: Unocal's position in Azerbaijan is almost as strong as its position in Indonesia. The Azeris have been America's best and most constant allies in the region (not that it's hard to surpass, say, the Uzbeks as strategic partners). But this has isolated Azerbaijan to some degree, and the government in Baku is under lots of pressure domestically and internationally. As China revivifies the Shanghai Cooperation Organization, the local alliance of convenience for autocrats from Moscow, Beijing, and the region, the Azeris may want to hedge their American bets with China and the SCO.

To be sure, China's commodity strategy-at work in Sudan, Zimbabwe, and even in Venezuela-is a strategy that reflects Beijing's larger geopolitical weakness. But in the context of China's "rise," and combined with the People's Liberation Army's expanding ability to project military power, the strategy is having a greater effect than it normally might. In the case of Unocal, the economists should back off and leave the important decisions to the politicians.

Thomas Donnelly is a resident fellow at the American Enterprise Institute and a contributing writer to The Weekly Standard. Melissa Wisner is a researcher at the American Enterprise Institute.

© Copyright 2005, News Corporation, Weekly Standard, All Rights Reserved.

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