Investing in Middle Eastern Oil

Is China Winning the Middle East?
June 29, 2007

Hardline Islamists released six Chinese female hostages and one man last weekend after a 17-hour kidnapping in Pakistan. The issue: The Chinese were running a brothel. Technically, they called it a massage parlor. That's not the point. The point is this…

The Financial Times quotes: "The incident threatened to dent Pakistan's relations with China, it's closest ally, and the Islamists later claimed to have freed the captives to preserve the bilateral relations with Beijing."

We here at the Penny Sleuth wonder… When exactly did China become Pakistan's closest ally? Did we miss something? And more importantly, when on God’s green Earth did radical Islamists embrace sensitivity training in the realm of diplomatic relations?

Hmm…

This rather inexplicable turn of events comes off our discussion last week regarding oil negotiations between Iraq and China.

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You may recall that Iraqi President Jalal Talabani flew off to Beijing last week to revive a $1.2 billion dollar oil deal originally established between the two countries before the war.

China certainly seems to be making a great name for itself in that part of the world. And other than not hardlining Iran for being naughty by playing with uranium, they’re not really doing much to garner all this attention.

This trend highlights something uniquely Chinese. Chinese diplomacy is, and will always remain, strictly business. They don't swoop in with the flag of moral superiority. They couldn’t care less what type of government Country X adopts (excluding Taiwan, of course).

And it seems to be working. Look at the response. Iraq, Iran and Pakistan are all courting China like the belle of the ball. I'm sure they see a Chinese alliance as the natural balance to U.S. imperialism. Or maybe they just like to cozy up to the new guy on the block sporting all the cash.

Who knows? But one thing’s for sure: There are a few mainland companies whose long-term success is one of Beijing’s top priorities…one such company being PetroChina.

Controlling China’s domestic market will be one of Beijing’s very top priorities. Oil is much more than the commodity that fuels our cars. Petroleum-based products undoubtedly serve as the most important commodity driving domestic economies.

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Domestic stability rests on its relative availability. Consequently, Beijing will certainly protect the vested interests of the two large energy companies in which it holds significant stakes, PetroChina (NYSE: PTR) and Sinopec (NYSE: SNP). The Chinese government will never relinquish control of its domestic industry to foreign competition or market forces.

When the China National Offshore Oil Corporation (CNOOC) attempted to buy the Union Oil Company of California (UNOCAL), Washington went up in arms. It’s no wonder. It’s one thing to buy America’s first major computer maker, but any attempts to buy one of America’s most strategic oil companies wouldn’t be tolerated.

I guess that’s the way the world turns. You could call today’s Sleuth a soft push for Chinese oil companies. But I think the bigger picture is this…

In politics, it’s the economy that matters. Every capital around the globe knows this. Most get it right…others get by. But in the end, companies that drive domestic economies, blue chips like PetroChina, Yanzhou Coal or even Cheung Kong will do well over the long haul.

They may not make the best story, but the best companies rarely ever do.

Until next time,
Christopher Hancock

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