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Oil Digs Hole To China

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Foreign producers may secure future oil supplies.

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China understands the importance of securing future oil supplies, while some U.S. politicians seem baffled by the idea.

China Oilfield Services, the nation's third-largest oil producer, agreed to purchase Norway's Awilco Offshsore for $2.49 billion.

The deal will boost China Oilfield's rig fleet by nearly 50%. Jack-up rigs, used extensively in shallow-water drilling, are in high demand and orders are backlogged at least three years. China Oilfield Services is part of China National Offshore Oil Corporation, China's third-largest producer.

China, the world's second largest energy user behind the United States, has aggressively increased its search for oil and natural gas to sustain its booming economy. Oil recently fetched $141.60 a barrel on the New York Mercantile Exchange.

The deal requires regulatory approval by Norwegian officials, but there appears to be no organized opposition. In 2005, Congressional intransigence killed China National Offshore's plan to acquire Unocal. Later that year, Chevron (CVX) bought Unocal for $17.8 billion after the Pentagon described China as a strategic rival.

China has negotiated lease agreements with Cuba and apparently plans to drill in the ocean about 60 miles from Key West. Cuba's state-owned oil company, Cupet, also has agreed to exploration deals with Canada, India, Malaysia, Norway and Spain. However, China has yet to begin drilling, according to press reports.

Nevertheless, Cuba's deal with China has led some to quote Daniel Day Lewis's character Daniel Plainview in the movie There Will Be Blood: "I drink your milkshake! I drink it up!" Some fear that slant drilling will allow China to tap U.S. offshore reserves. If nothing else, China's active, while the U.S. does nothing except yap.

John McCain, the presumptive Republican presidential nominee, now calls for lifting the ban on offshore drilling, but is still opposed to exploration in Alaska's Arctic National Wildlife Refuge (ANWR).

The proposed drill site is located on the arctic plain several hundred of miles from the Brooks Range and makes Kansas look exotic. It's close to Prudhoe Bay and oil from the ANWR could be pumped through the Alaska Pipeline to Valdez for shipment to West Coast refineries.

Barack Obama, the presumptive Democratic presidential nominee, turns thumbs down on drilling offshore and in the ANWR.

But that may be the least of the nation's problems.

Democratic Representative Maurice Hinchey of New York recently told Fox News, "We (the government) should own the refineries. Then we can control how much gets out into the market."

What's the good-hearted shareholder of Exxon-Mobil (XOM), Conoco (COP), Sunoco (SUN) or Hess (HES) to say to that?

At a recent Congressional hearing on high prices at the pump, Democratic Representative Maxine Waters of California said, "And guess what this liberal would be all about? This liberal would be about socializing – er, uh, (pause)…Would be about…basically…taking over, and the government running all of your oil companies."

Now there's change the late Mao Zedong can believe in.

Just don't ask how it would increase oil supplies or bring down prices or help those who hold oil stock in their retirement portfolios.

Today's study question: What is it about supply and demand that Beijing understands - but some members of Congress don't?
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No positions in stocks mentioned.
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