CNOOC Limited (ADR) (CEO)

ChrisGraley (< 20) Submitted: 2/19/08 11:09 PM : Start Price: $137.56 CEO Score: -9.40

Let me ask you a question. Given the length of time of the high price of oil, why aren't we seeing the same inflationary impact on the US economy as we did in the oil crisis of the 70's?

The answer is that the U.S. has a different economy now. In the 70's the economy was still manufacturing based and now it's service based. Gasoline is not as crucial in a service based economy.

Wait you say, we still buy manufactured goods, somebody is still burning gasoline and that cost should still be passed on to the US consumer and normally you'd be right, but those goods happen to be made in China right now. The same China that owns 70% of CNOOC. The same China that sets all the rules regarding their economy. The same China that sets their own value of the Yen vs the US dollar. The same China that says you can sell them oil as long as you go through one of their oil companies like CNOOC. The same China that sells crucial military and warfare technology to the same OPEC countries that have all the oil. The same China that has an economy that's growing by leaps and bounds and realizes that fossil fuel is one of the few things that could derail their economy. There are far too many ways that China can control the impact of foreign oil. An easy indicator of oil prices having an effect on China should be the Baltic Dry Shipping index. If manufacturing is down then imports of raw materials should be down as well. What we see though is a record amount of imports and a high Baltic index. Now I'm not saying that the US economy is totally unaffected by high gas prices. They still have to haul the goods from the dock. But the pressure is not anywhere as great as when the goods cost much more to make in the first place.

Now there's a secondary factor that may extend the high price of oil. It was that same inflationary pressure in the 70's that helped increase supply and decrease demand. I believe that while the average consumer will decrease demand the corporate world will not unless it really starts to hurt the bottom line. I also believe that if China and the OPEC countries are colluding it makes it that much easier for the OPEC nations to control supply.

Given all this I'm inclined to stick with CNOOC until the Baltic index takes a big dip.

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