China says drill, baby, drill

Dow Jones Newswire reported last week that the state-owned China National Offshore Oil Corp (CNOOC) is negotiating with Norway's StatoilHydro ASA for oil leases in U.S. waters in the Gulf of Mexico.  You may recall back in 2005 CNOOC tried to acquire Unocal Corp., but was thwarted by the Congress based on national security grounds.

David Pierson makes the case today in the L.A. Times, that, if true, this deal puts the U.S. in an awkward spot:

Whether CNOOC's second attempt to lock up U.S. petroleum assets will trigger a similar political backlash remains to be seen. The sour U.S. economy and the need for Washington and Beijing to cooperate on potentially larger issues could mute any outcry.

The U.S. could also find it difficult to rebuff China when it has long welcomed other foreign investment in the gulf. In addition to StatoilHydro, foreign oil companies with stakes in deep-water projects there include Spain's Repsol, France's Total, Brazil's Petrobras, British oil giant BP and the Dutch-British multinational Shell.

The U.S. risks undercutting its foreign policy goals as well. Concern is growing over China's aggressive investment in oil-rich nations with anti-U.S. regimes, including Iran and Sudan. Denying China a shot at drilling in U.S. waters would only encourage Beijing to make deals in volatile regions given that new oil reserves in stable, democratic nations are getting harder to find.

One of the "potentially larger issues" that Pierson doesn't directly address is America's growing dependence on China for cash.  In 2005, China was the second largest (to Japan) foreign holder of U.S. Treasury securities, with $310 billion.  By 2008, China had eclipsed Japan to become our largest foreign lender, and amassed a U.S. debt portfolio exceeding $727 billion.  At the end of August of this year, those holdings had increased to almost $800 billion.

If the President is able to get his way on costly initiatives such as health care reform and/or cap and trade, there is little doubt that our borrowing from the Chinese will accelerate.  This fact alone suggests to me that Congress and the Obama administration will not put up much of a fuss about this deal.