Reds Under The Bed! Yellow Ones, That Is
July 05 2005 - Australasian Investment Review – (AIR)
Americans are paranoid. No, I don’t just mean in general, I mean they’ve turned a new shade of paranoid recently after a Chinese company, China National Offshore Oil Company (CNOOC) had the sheer audacity to make a formal bid for one of the icons of everything America stands for – an oil company. Unocal, to be precise.
For the last couple of years the US has been leaning on the Chinese government to do something about its currency, and, subsequently, the US current account deficit. Only then can Americans comfortably continue with their God-given right to consume more than anyone else.
To date, China has politely told the US to get stuffed.
In a culture where "loss of face" overrides all other considerations of national importance, China has decided to do what it wants, when it wants with its own economy.
This may or may not involve revaluation, but were this to occur it is unlikely US duress would prove to be the most influential factor.
In fact, China has recognised one way to address the trade imbalance, and that is to buy US companies, rather than continue to buy US treasuries (See this week’s cover story).
So freaked out is the US Congress in light of the CNOOC bid, and the subsequent "security" issues it portends, that Deutsche Bank believes the US Committee on Foreign Investment may attempt to frighten shareholders into accepting a lower bid by good ol’ ChevronTexaco.
Although Deutsche cannot see this actually working, it does bring into focus the growing US fear regarding its lack of energy independence. What happens if there’s none left to fill the Canyonero?
One problem is that the long-planned US policy of oil reserve expansion, otherwise known as the War on Terror, has failed. Iraqi insurgents have made sure the oil flow is unreliable at best, and Deutsche believes the Iraqi Oil Ministry’s claim of 2.1 million barrels per day flowing out of the country could be overstated by as much as 500,000 barrels.
Furthermore, the Ministry has put no money into oil production, leaving little scope for growth.
On the bullish side of the equation, long-time US ally Saudi Arabia has been managing to curtail terrorism and increase oil production. Current production seems healthy, reports Deutsche Bank, with low 2% annual depletion rates.
Costs have nevertheless increased, amid a tight global labour market and the scramble for "downhole" technology.
In a somewhat convoluted way, bullish sentiment is also garnered from a longer term negative view on the Caspian Sea countries’ ability to fill the global demand gap. Caspian oil production is predicted to top out in 2015.
This, as well as local political problems and the potential for pipelines to be sabotaged, could further stress upon OPEC the need to increase production, given generally constrained non-OPEC production growth.
If it’s not bad enough that the US has to turn to OPEC for help, it now has the Yellow Peril at the door, and a fear that a quasi-capitalist superpower opposition may prove more formidable than a totally communist one.