How would the CNOOC-Unocal deal affect oil price?

CNOOC/Unocal deal can only lower oil price, as explained by this Washington Post Editorial, and this commentary. Because

  • China (or any oil importer) has the incentive to lower oil price by maximizing production, while the oil corporations (and Saudi, and even many in the US government) do not
  • In the deal proposal Unocal's reserve in US will not be touched (or will be sold away back to US business). Unocal's reserve outside US are mostly natural gas (need to be converted into LNG as there is no pipe connection), so the most likely scenario is for China to divert the LNG back home, hence shifting China's oil consumption into LNG, or in longer term helping with the global effort in learning how to lower the cost of LNG power generation. In either case, the world demand in oil will be soothed
  • The sums of supply and demand of oil in the world do not change even if all Unocal's production are sold to China, because such activity reduces supply to rest of the world at the same time it reduces demand from China, by the exact same amount. China is going to purchase that amount of oil from world market if it does not buy it from Unocal, perhaps at a higher price, hence pushing up the oil price in the world market.
  • As stated previously, if CNOOC tries to push up the production of the Unocal field, it is going to increase demand and hence lower the oil price in world market. The supply will only be squeezed if China buys more oil than its own demand. Because Unocal's total daily capacity only represents less than 15% of China's import, or less than 7% of its daily damand (much lower in future as its demand increases), it is impossible for China to hoard oil

In short, only oil exporters such as Russia and Saudi has the power to change the oil price, and hence the power to pose security threat to US oil supply. Economic analysis shows that changing hand of an oil field to a net importer does not change demand supply balance. The Unocal deal is not neccessarily a good deal to CNOOC as viewed by many (see also WSJ Jun 23rd about PE comparison), the US congress is probably doing CNOOC shareholders a favor by blocking the deal. However, conflicting message to China about free market is not going to help US achieve its goal of promoting free market and democracy, whatever such goal is or if such goal exists. Even worse, does US prefer to corner China into where it has no other option for energy than dealing with Sudan, Libya and Iran? or to push China into hoarding more crude oil reserve than it plans as a result of insecurity of lacking oil reserve (China has the greenback to do so)?


Anonymous said...

Maybe the issue is not really price. It appears as if the US and China are in strategic competition to lock up energy supplies. Scarce and decreasing energy resouces may in effect end up being "allocated." In this situation having a national company owning a supply may be advantageous. The natural gas would be diverted to the US or China depending on who "owned" it. Other asian customers would lose out.


Sun Bin said...

hi fred,

thanks for the insight. yes, your point is valid when there is a global shortage of supply (i.e. supply cannot meet demand on a globale basis and each nations need to ration its energy supply).

however, one scenario in which such circumstance arises is that the oil exporters (indonesia, malaysia) will begin to "nationalize" the oil fields. it will be oil importers like japan who first lose out, then china. the US will be in the middle of the line (or very close to the last) to ration, because it has cleverly saved its own reserves while importing from the middle east.

Anonymous said...

Sun bin - Somehow, I don't think that the US has been "clever" in saving some reserves. I think the off-shore oil and arctic refuge oil is still in place only because environmentalists and others thwarted the oil companies who wanted to pump these areas.

Today the US imports some 56% of its oil. I think that it is possible that the Saudi Arabia oil fields may actually be topping out and that the US gov and the Chinese gov both realize this and have entered into a frantic effort to lock up energy resources for a future of declining energy supplies. The war in Iraq only makes sense in this strategic context.

Did you read this recent article by Engdahl in the Asian Times?

Some of it is over the top but Engdahl leaves a strong impression that the US and China are entering into an intense competition for oil and gas. He interprets US activities in the near east and asia as focussed on isolating China from oil supplies.

The Bill Gertz Wash Times article on June 26 also focussed on US - China oil and military issues. The US military is concerned. President Hu Jiantao himself brought up the “Malacca-dilemma” as the key to China’s energy security.

This is an unstable and scary situation when geopolitics trump economics. Things may turn out badly. (Or maybe as I get older the world just seems more out of kilter?)


Sun Bin said...


I agree that there is certainly a result of competition for resources such as oil, at the corporation level and maybe also at the state level.

However, I am not totally convinced that US is trying to starve ('isolating') China of oil. It is more about US's desire to secure itself of the reserve than trying to harm China (although there is certainly such a group of people within US, and they are very influential). I am not convinced because such isolation is not implementable. As long as China remains peace-loving it can compete to bid up the oil price in the international market. US does not have an excuse to impose an embargo. The pre-requisite for starving china of oil is war or war like confrontation. I am an optimist and I believe the largest scale of war is (the unlikely scenario) a locar war in Taiwan. I believe US will not be involved even if that happens.
-- China still has the counter measure of building nuclear power plant and save their domestically produced oil for that local war. So embargo won't work.

There is certainly the political and military related aspects of oil (and other resources). But ultimately neither US or China wants to go to war. So I think oil will more likely to be used as a 'deterance tool' by the US.

When oil is finally depleted in our planet, it would be the end for all nations. US may be able to burn oil for 20 or 50 more years than China. Therefore, either we (human beings) will find new energy solution (gas, shale, nuclear fission and fusion, vegetable oil, photosynthesis!), or we all switch back to Amish living. In the years before the Final Depletion we will see how free market forces change our daily lives as oil prices soar.

p.s. has US been pumping at its full capacity at the gulf of Mexico when oil price is under $40?
p.s.2. IMHO the war on iraq only makes sense if saddam and bin laden "DID" work together to threaten world peace :) there is no guarantee than Saudi would not be turned into another Saddamist Iraq tomorrow.