– China, Growing Superpower

China's global bid for energy
Richard D'Amato

It is no secret that China is quickly transforming itself into a global economic and military superpower. China's economy has grown dramatically -- 9 percent in 2004 and more than 8 percent in 2005 -- and its government is eager to feed its economy and its upwardly mobile 1.8 billion people with natural resources that it does not currently possess.

The largest communist nation in the world thus has ambitious plans to build and acquire vast energy reserves. China Daily has reported that the country hopes to quadruple its nuclear-power capability by 2020 by bringing online the first of four planned nuclear reactors, representing a $54 billion investment.

In addition, China has its eye on oil. Last month, a Chinese government- owned oil company executed a hostile attempt to break up a friendly merger between two U.S. oil companies, Unocal and Chevron. It did so in order to get the country's hands on one of the world's largest available oil and gas assets. Its offer to gobble up Unocal represents only the latest in a series of China's international energy investments. Its state oil corporation has investments in roughly 26 nations, including Iran, Iraq, Kazakhstan, Saudi Arabia, the Sudan, Syria, Korea and Azerbaijan.

China claims the Unocal takeover is not a government-supported plan, but instead, simply a commercial transaction by the publicly traded arm of its national oil company to create "shareholder value." "We don't get a penny from the government," said Yang Hua, the chief financial officer of the Chinese oil company.

But as details of the Chinese company's takeover bid became public, a multibillion-dollar subsidy by the Chinese government and its central bank was revealed, some of it in the form of zero-interest loans. Also worth noting is that the "shareholders" for which the Chinese executives are allegedly trying to create value are 70 percent controlled by the Chinese government.

In response to China's brazen energy grab, the House of Representatives, in a landslide vote of 398-15, recently adopted a proposal to essentially reject the China bid. This is the political equivalent of swinging a sledgehammer through a plate-glass window, and it signals a growing possibility that Congress may attempt to derail the deal, or take other punitive action, if the executive branch caves in to China. The House Energy Committee chairman, Rep. Joe Barton, R-Texas, a colleague of President Bush, is highly skeptical of the deal and has announced hearings in the near future. The clumsy and heavy-handed threats leveled by the Chinese government at Congress to keep out of the way of this deal are sure to evoke even stronger reaction.

China's lightning-fast growth accounts for roughly 40 percent of the increase in world demand for oil, and that pace is expected to continue for another 15 years. Clearly, China will be America's biggest competitor for limited oil and gas reserves in the decades to come. With global demand for oil at it highest level in history, it is safe to assume that any increase in Chinese control of limited energy resources raises the likelihood that China will divert these resources to feed its burgeoning domestic economy. In the present market, where only 1 million to 1.5 million barrels per day of spare oil capacity exists, any such diversion could throw regional markets off balance and cause severe economic dislocations in the United States, pushing oil and gasoline prices to unprecedented levels.

Congress is rightly concerned that allowing China to purchase Unocal poses an outright threat to national security and an ominous precedent of more energy acquisitions to come. Ultimately, however, it is not Congress that will block this hostile takeover, but the Bush administration, which has the legal responsibility to carefully scrutinize and judge the Chinese proposal on the grounds that it threatens U.S. security interests, particularly by denying U.S. access to crucial oil reserves in an energy-scarce future.

In addition, Unocal deploys highly advanced technology for the production and exploration of oil and natural gas, including sophisticated drilling and seismic technology and geographical survey data. Many of these technologies have potential military applications. Allowing them to be bought by a communist regime that is already doing business with a number of countries hostile to the United States would be a costly mistake. The United States should strongly encourage China to abandon mercantilist, acquisitive strategies for securing oil, and to participate instead in the open, global oil market. In the meantime, American efforts to develop alternative energy resources are clearly long overdue and the only long-term safety net against increasingly scarce resources.

Richard D'Amato is chairman of the U.S.-China Economic and Security Review Commission.