UNOCAL shareholder rights

Alan Reynolds
Posted: Jul 14, 2005 12:00 AM

When I first read that the China National Offshore Oil Corp. (CNOOC) had offered to buy Unocal for about $7 a share more than Chevron offered, my initial reaction was that this is none of my business. Foreign and U.S. investors who own shares in Unocal have a right to sell their shares to anyone they please. They get to vote on Aug. 10 about Chevron's offer of $60 a share, but Unocal stock has risen above $66, partly because second quarter profits were 20 percent higher than expected. And CNOOC is rumored to be thinking about offering more.
Although shareholders might well consider other aspects of the deal, there are big bucks involved in trying to keep Chevron's bid a few billion cheaper than CNOOC's. All that money has generated the usual lobbying -- disguised as concerns about economic or national security.

 Unfortunately, the U.S. Congress cannot grasp the idea that anything might conceivably be none of their business. Congressional meddling tends to be short on humility and long on hypocrisy. U.S. politicians who think it vitally important for the United States to reduce the Persian Gulf's 21 percent share of our oil imports nonetheless feign shock and outrage when China wants to shrink its 56 percent dependence on Middle Eastern oil.

 California Republican Rep. Richard W. Pombo recently issued a press release about the CNOOC bid, claiming "disastrous consequences for our economic and national security."

 Claims of significant economic consequences are transparently fatuous. As the Cato Institute's Jerry Taylor explained in recent testimony, Unocal's domestic oil production amounts to only 0.3 percent of what we use. Even if that trickle of oil was exported to China (which won't happen), "it would have no effect on America's vulnerability to oil supply disruptions abroad. That's because it makes no difference from an economic standpoint whether the oil we consume is produced domestically or from foreign sources."

 Republican Rep. Joe Barton of Texas wrote in USA Today that, "What the Chinese seem to know ... is that energy independence is at least as much about who controls the means of production as where the energy originates."

 On the contrary, neither the domestic supply nor price of oil and gas has anything to do with who owns it, nor where it is located. Americans are no less "independent" if they buy their gas from British Petroleum or Royal Dutch Shell. Consumers and manufacturing industries in economies that import no oil at all, such as the United Kingdom, Canada and Mexico, nonetheless feel the pain of high world oil prices.

 Gibberish about foreign ownership of Unocal shares having a "disastrous" impact on the U.S. supply or price of energy has been thoroughly discredited by veteran Washington Post writers Sebastian Mallaby, Robert Samuelson and Paul Bluestein. Unfortunately, that Beltway embarrassment just shifted the lobbying efforts toward the first refuge of scoundrels -- national security.

 The national security pitch first took the form of demanding the CNOOC bid be vetted for national security threats by the top-level Committee on Foreign Investment in the United States. When CNOOC called that bluff, the House panicked and voted 333 to 92 to forbid the Treasury Department from spending a dollar to allow the committee to evaluate the alleged national security interest risks. Why do that unless the arguments could not survive scrutiny?

 Even Terence Jeffery, the sensible editor of Human Events, got sidetracked by contemplating economic warfare. "Would the United States be in a stronger or weaker position to deter the PRC from invading Taiwan," he asked, "if it no longer had the power -- short of using force -- to shut down the sale of Unocal oil and gas to the PRC?"

 But the United States is a huge importer of oil and gas, which makes the hypothetical embargo on U.S. oil and gas exports a purely comical military threat. Since most of Unocal's oil and gas comes from places like Indonesia and Canada, the United States would indeed have to use military force (which runs on oil) to shut it down. That might have an effect on world supply, but it would hurt the United States more than China.

 Jeffrey offered another scenario in which terrorists shut down Saudi oilfields. "As crude skyrockets, the PRC devotes all Unocal production to Chinese consumption. What would that do to the cost of gas at the pump in U.S. suburbs? Would it help trigger or deepen a U.S. economic crisis?"

 The answer is that it wouldn't make any difference at all. If you can believe (as China does not) that the United States would actually allow China to import oil from U.S. soil, that means China would import that much less from places like Russia, thus freeing up that oil for U.S. use and leaving the world oil price exactly unchanged.

 A far more nebulous national security anxiety claims that, as Barton put it, "Unocal uses advanced technology that can be bent to military purposes." Frank J. Gaffney Jr. was specific. He worried that Unocal owns MolyCorp, which mines for lanthanide used to produce the "rare earth magnets" in "many advanced weapons systems." But nobody has to buy Unocal to get the raw material, since that advanced technology can easily be ordered from

 Gaffney sees China's Unocal bid as a big step toward "cornering the market on energy." He fears that "U.S.-owned energy assets, know-how and technology would migrate to what is, at best, a competitor."

 Actually, Unocal's energy assets would remain right where they are -- mainly in Asia and Canada. Unocal's oil and gas fields cannot "migrate to China," and neither can MolyCorp's mines. When it comes to "know-how and technology," larger U.S. and Canadian energy companies have long been supplying those to China. In a recent Wall Street Journal piece, Chevron CEO David O'Reilly boasted that, "We have strong partnerships with CNOOC on several large energy projects."

 Unocal is the property of its shareholders. They alone have the right to sell their shares to Chevron, CNOOC or none of the above. Politicians need to be reminded that when it comes to business, it is usually none of their business.