Tuesday, August 09, 2005

Folly of Stopping Unocal Deal

Congratulations, James K. Glassman, a fellow at the American Enterprise Institute and host of TechCentralStation.com ( a Blog quoted on Lost Legacy more than once recently), for talking eminent Smithian sense on the Unocal, the tiny oil company, and its attempted purchase by China!

Glassman being closer to the scene, names the names and pitches it at ‘em with gusto. Among the names we have: “Rep. Duncan Hunter, R-Calif., chairman of the Armed Services Committee, Lou Dobbs of CNN, Sen. Byron Dorgan, D-N.D., of the Midwest isolationist caucus ... and to all the rest of the xenophobic crew.”

That is what it became; sheer xenophobia. (Is Duncan Hunter's affiliation a cause or sympton of the xenophobia on Uocal?)

Asks Glassman: “Why is the strongest nation in the world -- a country with an economy larger than its next five competitors combined -- scared about the takeover of a truly minuscule American firm?”

Good and unanswered question.

And the facts:

“Unocal in 2004 produced just 70,000 barrels of petroleum a day. That's less than one-half of 1 percent of U.S. consumption and less than one-10th of 1 percent of world consumption. Only one-third of Unocal's reserves and none of its refineries are in the United States.

Even if CNOOC decided to ship all of Unocal's North American oil and gas to China -- an absurd proposition when a market for it exists right here -- the loss of U.S. supply would be trivial. Global supply would be unaffected.”

And the consequence of allowing the shareholders to sell their company:

“Meanwhile, the United States, deprived of Unocal oil, would purchase the missing supply from any of dozens of providers around the global. Prices would be unaffected.”

And the likely consquene of blocking the deal for political reasons plus not a little paranoia:

“Any disruption of trade -- in goods, services, people or capital -- necessarily raises costs and slows economic growth. That was Adam Smith's lesson in 1776, and it's still true today.”

Glassman points to another problem for the US: the changing demographics which show that US living standards cannot be maintained for an ageing population with declining numbers of young wage earners to support increasing numbers of retirees. From this the structure of wealth creation has to change, included in which changes will be increasing foreign ownership of US assets and increasing US ownership of foreign assets, or, absent such changes, declining domestic wealth creation.

And it is already happening, with foreign ownership of US financial assets. And US ownership of foreign assets, including Chinese also grows. Glassman notes:

“Currently, China's investment in Western business is tiny. Meanwhile, U.S. investment in China is rising. Take Chinese oil companies. Berkshire Hathaway, Warren Buffett's company, has a one-eighth interest in PetroChina. ExxonMobil owns one-fifth of Sinopec. Those two firms, plus CNOOC, have all launched successful Initial Public Offerings in the U.S., selling shares to American investors.”

Where does this leave the Unocal deal?

“But Unocal? How pathetic, childish and cowardly! This is not the behavior of a courageous nation founded on political and economic freedom.”

How true! Adam Smith’s polemic against mercantile economics has been forgotten. The new mercantilism – global protectionism – is stirring to a still distant drum beat. We need more people like James Glassman to tell it like it is to mute the mercantile, and xenophobic, drums.

You can read James Glassman’s article in the Minneapolis “Star Tribune”, 9 August 2005 (
www.startribune.com) and on "RedNova", from Dallas, Texas (RedNova.com). Read it and e-mail to your circle, for and against the Unocal deal.


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