Our Unfree Stock Market, CNOOC, and Mr. Gaffney
by Michael S. Rozeff
by Michael S. Rozeff
America, the verbal champion of freedom and capitalism, does not have a free stock market and has not had one for a very long time. It will take me another time to document the many interferences and restrictions that our government places upon the stock market. Right now, we have before us a clear instance that has made headlines.
The lack of a free market in shares is exemplified by the recent failure of CNOOC to buy out the American oil company, Unocal. Congress stopped this buyout dead; but there was also no shortage of hysterical American reaction. Why? Because the firm CNOOC is a Hong Kong firm controlled by a parent Chinese firm, Chinese National Offshore Oil Company. Unocal (UCL) is a domestic firm built up from the old Union Oil of California.
Who owns Unocal, the Congress, every American chauvinist who could speak or write against the buyout, or the stockholders of Unocal? Not the stockholders. Actions speak louder than words, and Congress's action tells us yet again that American is not the land of the free. In our government, it is the land of the hypocrite and thief. It is wrong to try to gain security by appropriating your neighbor's back yard.
If an owner cannot dispose of his property himself, he has lost decision rights. That means he has lost property rights and lost a degree of ownership. His property has been taken. Congress is in the habit of taking property. Congress is a thief. No market is free in which Congress interferes to manipulate, regulate and tax. To say that America has free markets is monumental gibberish. To call the roll of all the meddling and disruption introduced by Congress into every conceivable market is work for many a day. I will just say now that the idea of what a free market even looks like or operates like is quite foreign to the U.S. of 2005.
What losses did Congress impose on the UCL shareholders? At the moment they are looking at a Chevron bid for UCL of roughly $700 million less than the CNOOC bid that Congress thwarted. Will Congress compensate the shareholders? Never, and if they did, whose money would they use? That's $2.50 a share less than the CNOOC bid. Do you own 100 shares? You just lost $250. CNOOC's bid was definitely not stingy. When the deal fell through, its stock jumped up 6%. That means that its bid was high enough that it was overpaying for UCL!
Mr. Frank J. Gaffney, Jr. argues the national security case against CNOOC in National Review Online. He views the acquisition as a "peril." (Does he intentionally want to remind us of the Yellow Peril?) It is "ominous." China is seeking "strategic advantages." The bid is an act of "sheer brazenness." China has a "yawning appetite." It's interested in "cornering the market on energy."
I suppose we should, as Mr. Gaffney does, ignore the fact that U.S. companies made foreign direct investments of $252 billion in 2004 alone, and cumulative investments of $1,512 billion between 1995 and 2004. A huge amount went into China. China has been content to finance the U.S. government deficits by buying its paper, but how dare a Chinese company invest directly in a U.S. company! Those monsters! They're trying to take over!
I suppose we should, as Mr. Gaffney does, ignore the implications that trading with China has for peace, a word not in his vocabulary. Instead let us go back to pre-Nixon days, the days of John Foster Dulles. Let us not recognize the country at all, despite its importance and its numbers. Let us try to isolate it and contain it. Let us seek opportunities to get it mad. Let us demand that it revalue the Yuan or else! Let us find ways to needle it and threaten it. Let us treat it as some sort of inferior. This is such smart foreign policy. Why didn't the rest of us think of this? These neocons are beacons of light, Gods among men, such wisdom they possess.
And Mr. Gaffney tells us we should really be quaking in our shoes because Unocal owns the old Molybdenum Corporation of America that has a rare earths mine, apparently the only one in the U.S. And rare earths are used in magnets that go into U.S. advanced weapons systems. Wow! I am really scared now, so scared that I searched Google for rare earth magnets. I can buy a pack of 10 from Amazon for $4.99. Actually there is a retailer down the street in Tonawanda, New York. An encyclopedia tells me "They [rare earths] are widely distributed in the earth's crust and are fairly abundant, although they were once thought to be very scarce."
A new rare earth mine is on tap in Northern Saskatchewan. A number of other ventures are exploring in Canada. Australia is a sizeable source. China already supplies 80% of the world's rare earth minerals, but could it be that the reason is that it is the low-cost producer? That's what those involved in joint ventures in China tell us clearly. Any attempt by China to cut off supplies or raise prices to the world would be greeted in the same way that the world reacted to the oil cartel's actions in the 1970's. There would be a mad dash to bring new mines into production using those "widely distributed" amounts in the earth's crust. And why would China do such a thing? There is every indication that China is bent on making economic progress by peaceful means.
I think Mr. Gaffney has cleverly seized upon this rare earths detail to weave his flawed portrait of a China pursuing world domination. It reminds me of a 1940 serial in which the Mysterious Doctor Satan sought a control device for his robots so that he could rule the world. It will take separate articles from me or others on LRC to provide a more accurate assessment of Chinese actions and motives than the distorted Gaffney vision. We are not the experts on foreign policy that he is. We did not serve in the Reagan Administration. We do not possess his crystal ball that tells him the deepest motives of the Chinese, that they are seeking "dominant positions with respect to strategic energy resources, minerals, materials, technologies, choke points, and regions all over the planet (including, notably, our own hemisphere and Africa.)" He means Venezuela, friends.
If I did not know he was talking about China, I'd think he was describing the U.S. It's legitimate, friendly, and unthreatening for the U.S. to position itself on China's doorstep and even inside the country, but for them to make the least move beyond a line that we draw, why that is an horrendous threat. Why "Beijing is feverishly giving its armed forces the capability to fight us should push come to shove." Mr. Gaffney seems quite fond of adjectives designed to stir up his readers. However, I think he has forgotten that the Chinese already fought the U.S. to a standstill on the Korean Peninsula. He may also have overlooked a few years in which the U.S. possessed its own military fever. Has it ever subsided?
A few aspects of a more balanced view can now be discerned. First, let us think on some sort of practical grounds of oil, leaving aside the detail of who owns UCL. Even then our government monkey wrench on the deal makes no sense. UCL is a drop in the world oil bucket. The proven reserves of UCL are 1.8 billion barrels of oil equivalent. For the world, proven oil reserves are roughly 1,000 billion barrels and 6 billion new barrels are discovered each year, while about 25—30 billion barrels are consumed annually. Proven and untapped oil reserves located in China and the U.S. are roughly equal at about 4% each of the total world reserves or about 25 billion barrels. (All these numbers are rough.) We exist in a world oil market. As I have written before, the major producers cannot eat their oil. They want to sell it to us, so why should we worry about roping in a trivial domestic supply?
We are dependent on foreign oil, and that's it! We cannot make that fact go away short of conquering or dominating a whole bunch of countries, yet that seems what the U.S. is up to. That is asking for trouble. It is unnecessary. It is provocative. It sets the worst possible example of world leadership. It sets the whole world on a course of suspicion and mistrust and armed competition. It encourages armed rivalry. It shows that we have no faith at all in the doctrines we preach about freedom and free trade. A fine world we are building by attempting to secure their oil for ourselves and shutting anyone else out.
Second, if China wants to assure oil supply, so what? That's not unusual these days. The Iraq War has played an important role in causing this to occur. Many countries have built up and are building up stockpiles of oil known as "strategic oil reserves." These are inventories owned by the State. The U.S. stockpile is 0.66 billion barrels. Japan's reserve is about 0.32 billion barrels, and China is building up initial State reserves of 0.1 billion barrels. India recently launched a strategic oil reserve program too. Thailand and Japan have increased theirs. If Mideast oil is made less certain by war, if the U.S. seeks to control greater amounts of oil, then other countries naturally react by seeking their own supply sources and building up reserves. Like a missile race or an arms race, an oil race occurs.
Third, the U.S. is a hypocrite in more ways than one. It cannot long maintain credibility by saying one thing and doing another. Not only does it trumpet its domestic freedom and continually destroy it, but it also advertises that it's for international freedom and free trade and markets. However, when a country like China builds itself up peacefully, not through war, it is still viewed by the influential Gaffneys of this country and their government counterparts as out to "supplant the United States economically and strategically and, if necessary, to defeat us militarily in the decades to come."
Our native Gaffneys and militarists cannot have it both ways. They cannot simultaneously speak of freedom and then criticize and raise red flags when a country or a foreign company uses that freedom to make a purchase of a domestic company. Their hearts are plainly not with freedom and peace at all. They are hypocrites and dissemblers.
A free market in stock plainly means, among a number of other things, that anyone can buy any amount of stock at any time and at any price he desires if there is a willing seller. If the Unocal shareholders wish to sell out to CNOOC via a tender offer or if the Board of Directors has the power to accept or reject buyout bids or whatever mechanism is in place, this is no business of yours, mine, Congress or anyone else, including the regulatory dictators. In a free market, the owners would decide without outside interference. So a free stock market we do not have.
August 4, 2005
Michael S. Rozeff [send him mail] is the Louis M. Jacobs Professor of Finance at University at Buffalo.
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