Sunday, January 15, 2006

Quick, someone call Eliot Spitzer!

Something I saw in the news Friday:
China, India to Cooperate in Oil Hunt

China and India have agreed to share information on what they're paying for foreign oil and gas to fuel their energy-hungry economies as they try to tone down a rivalry that was driving up asset prices abroad, the Chinese government announced.

The agreement was among five energy cooperation deals signed Thursday during a visit to Beijing by Indian Petroleum and Natural Gas Minister Mani Shankar Aiyar, the government said.

Beijing and New Delhi promised to exchange information when bidding for oil resources abroad.

"Unbridled rivalry between Indian and Chinese companies is only to the advantage of the seller," China's official Xinhua News Agency quoted Aiyar as saying.

Chinese companies have been bidding aggressively for foreign oil and gas in areas as far-flung as Africa and South America as Beijing tries to secure energy supplies.

India's effort is on a smaller scale, but its energy demands are expected to soar in coming years as its economy grows.

In December, the biggest state-owned oil companies of the two countries — China National Petroleum Corp. and India's Oil & Natural Gas Corp. — agreed to jointly acquire oil production rights in Syria in their first collaborative venture.

That came after the Chinese company won a bidding war with its Indian rival for an oil producer in the central Asian republic of Kazakhstan.

CNPC agreed to pay $4.2 billion for Canada-based PetroKazakstan Inc. in China's biggest foreign corporate acquisition to date.

This week, another Chinese state-controlled oil firm announced it was buying rights to an oil field in Nigeria after India's Cabinet blocked ONGC's attempt to buy it.

Other agreements signed Thursday call for Chinese-Indian cooperation in exploration and refining, laying cross-border oil and gas pipelines, research and the development of energy efficiency programs, Xinhua said.

They also promised to work together on alternative fuels such as vegetable oils blending with diesel and ethanol blending with gasoline, the report said.
Someone call Spitzer's office right away so that New York's real King Kong (a crazed ape) can spend millions of dollars just to start another investigation. This, after all, is collusion among big (government-owned) business! In reality, there's nothing wrong with partnerships between buyers, just like there's nothing wrong with partnerships between sellers.

Cartels don't work for the simple reason of competition: competition within its members. Long before oil prices started rising, several OPEC members, including Kuwait and Saudi Arabia, were already pumping more oil than their quotas (which are production limits, not minimums). While this was done with the knowledge of other members, it illustrates the principle that "price-fixing" agreements never last. Competition eventually, and inevitably, is spurred by the desire for a greater share of sales, which some call greed. "Greed is good," however, and very good indeed. It's good for the seller who is willing to accept a lower price to boost sales and thus get higher profit in the end. More importantly, it's good for buyers, who will get a greater supply and lower prices.

Similar, a "buyer's cartel" will last only until one member decides that it's willing to outbid the others so it can purchase a greater share of the resource. This is not inherently a bad thing: prices are fundamentally a reflection of an item's scarcity, and higher prices encourage sellers to supply more. India and China have forged agreements so that they don't drive up prices faster than they can afford them, but the question is not if the deal will last, but when it will cease. The nature of competition makes it merely a matter of time. Which country will be the first to decide to break things off after deciding it's willing to pay higher prices (and perhaps secretly) for petroleum? Your guess is as good as mine.

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