China Takes Control of Oil Prices: Three Levers
While the war in Iran blocked the Strait of Hormuz, Beijing quietly reduced oil imports by 5.5 million barrels a day and knocked $30 off prices, writes The Economist.
While the war in Iran blocked the Strait of Hormuz, Beijing quietly reduced oil imports by 5.5 million barrels a day and knocked $30 off prices, writes The Economist.
Shortly after Iran made the Strait of Hormuz impassable, halting the transport of 14 million barrels of crude oil a day, the global market faced a potential catastrophe. While the US and Japan released a record two million barrels a day from emergency reserves, and Gulf monarchies rerouted oil via pipelines, the key move came from Beijing. According to The Economist's analysis, from February to June, China cut its crude oil imports by half, or 5.5 million barrels a day, enough to lower the price per barrel by $30 (around 50 KM).
For a long time, the Organization of the Petroleum Exporting Countries (OPEC) and its allies dictated prices by controlling production. However, weakened by the exit of the United Arab Emirates and the limited capacities of remaining members, OPEC is losing its primacy. In its place steps China, whose new role was summed up by one oil trading chief for The Economist: "China is the new OPEC".
Unlike the OPEC+ alliance, which makes decisions by consensus among 21 countries, China's central planners act unilaterally, on the orders of President Xi Jinping. Beijing has used three main levers to take control of the market.
Last year, as prices fell, China bought 200 million barrels of oil cheaply, filling its reserves to one billion barrels. Traders estimate these purchases raised global prices by $10 to $20 per barrel before the war broke out. Of the 11.6 million barrels imported daily in February, as much as one million went into building up stockpiles. When the crisis hit, Beijing simply stopped filling its storage tanks.
After the last pre-war shipments arrived in late April, China began drawing down its reserves. According to data from Vortex, by July, reserves had been reduced by 70 million barrels, and from April to July, a total of 150 million barrels were consumed, or 1.5 million per day. Most of this came from commercial stocks held by state-owned refineries. "Refineries usually have to replenish what they draw within a month," explained Tom Reed of Argus Media. But the authorities simply took the oil without any obligation to restock. Emma Li of Vortex estimated that China could maintain this pace for another four months before Beijing would start worrying about low reserve levels.
As the world's second-largest oil refiner, China ordered refineries in March to stop signing new export contracts and to cancel many existing ones. Exports of refined products fell by nearly half between February and April, to 430,000 barrels a day. This included 180,000 barrels of highly refined jet fuel, saving refineries 1.2 to 1.8 million barrels of crude oil per day.
By limiting exports, China secured more fuel for its domestic market and redirected crude oil to produce key raw materials it normally imports from the Gulf. Although refineries lose revenue, it is a financial sacrifice the Communist Party consciously accepts.
The third key move was reducing domestic consumption. In June, Chinese refineries processed 2.7 million barrels a day less than a year earlier. Gasoline production fell by 14 percent, and diesel and jet fuel by 21 percent each. The authorities allowed fuel prices to rise, prompting citizens to turn to the metro, bicycles, and electric taxis. Charging of electric vehicles on highways during the May national holiday rose by 55 percent year-on-year.
Ciaran Healy of the International Energy Agency (IEA) estimated that China consumed 10 percent less gasoline and kerosene in the first two months of the war. Local authorities postponed infrastructure projects, saving diesel, and the petrochemical industry adapted by producing polymers from coal and ethane.
Despite the dramatic measures, the Chinese economy did not stumble. GDP growth in the second quarter was 4.3 percent, the weakest result since the end of 2022, but this was due to weak investment and the property crisis, not oil shocks. Michal Meidan of the Oxford Institute for Energy Studies noted that the government can still tap into strategic reserves, which it has barely touched.
However, China cannot indefinitely reduce imports by 5.5 million barrels a day. While OPEC can maintain reduced production for years, China's reserves are not infinite. One unnamed distributor revealed he had just sold polyethylene stocks that had been sitting in his warehouse since 2021. But the war in Iran showed that China can independently stabilize the global oil market for months, a power that the divided oil cartel can only dream of.
