Why China can withstand oil’s surge past $100 more easily than other countries

The recent surge in oil prices following the Iran war has raised concerns across the globe, particularly in countries heavily reliant on oil imports. However, China seems to be less affected by this development compared to other Asian nations, thanks to its strategic energy planning and diversified energy sources.

China’s proactive measures include the accumulation of one of the world’s largest strategic and commercial crude reserves, estimated at 1.2 billion barrels as of January. This stockpile, equivalent to about 3 to 4 months of reserves, acts as a buffer against sudden spikes in oil prices. Additionally, China has been transitioning towards electric vehicles and renewable energy, aiming to increase the share of non-fossil fuels in total energy consumption to 25% by 2030.

Unlike many of its Asian peers, China has reduced its dependence on maritime oil flows over the past two decades. New overland oil pipelines and a shift towards renewables have decreased China’s reliance on the Strait of Hormuz for seaborne oil imports to about 40% to 50%. This strategic transition has positioned China uniquely in global energy markets, making it less vulnerable to disruptions in oil supply routes.

While the United States remains the world’s largest consumer of oil, followed by China and India, China stands out as the largest crude importer, purchasing nearly twice as much as the US. India, on the other hand, is the most dependent on petroleum imports, accounting for one-fourth of its total consumption.

China’s energy strategy diverges from that of the US, with a greater emphasis on diversification and renewables. In 2023, renewables, excluding nuclear power and hydropower, accounted for 1.2% of China’s total energy consumption, compared to just 0.2% two decades earlier. This growing share of renewables in China’s energy mix has global implications, as evidenced by the displacement of over 1 million barrels per day of implied oil demand due to the country’s electric vehicle push.

While fossil fuels, particularly coal, still play a significant role in China’s energy mix, the country’s increasing focus on renewables and electric vehicles is reshaping its energy landscape. China’s sensitivity to oil price fluctuations is declining, and its shift towards renewable energy sources and electrification of transportation is expected to further insulate the economy from oil-related shocks in the long run. The ongoing Iran war has raised concerns about the stability of global oil supply chains, particularly for China, which imports roughly 5 million barrels per day of oil from other Middle Eastern countries through the vulnerable Strait of Hormuz.

Muyi Yang, senior energy analyst at Ember, believes that this shock will only reinforce China’s existing trajectory rather than prompt a drastic change. The reliance on imported oil and gas highlights the risks associated with such dependence, emphasizing the need for a transition towards renewable energy sources and economy-wide decarbonization.

Despite the necessity for change, the transition will not be easy for China. The country’s fossil fuel industry is largely controlled by state-owned corporations, which may lack the agility and innovation of private-sector counterparts. However, there are indications that China is taking steps to mitigate potential disruptions in oil supply.

One strategy involves the expansion of strategic oil reserves. The U.S. Energy Information Administration has forecasted that China will increase its strategic stockpiles by approximately 1 million barrels a day by 2026. This proactive measure aims to enhance China’s energy security and reduce its vulnerability to geopolitical tensions in the Middle East.

Recent data from Wind Information reveals that China’s crude oil imports experienced a slight decline in 2024, but surged in response to escalating tensions in the Middle East, reaching a record high of around 580 million metric tons. Despite this material exposure to external risks, analysts such as Go Katayama from Kpler suggest that China’s energy strategy remains flexible and adaptable to changing circumstances.

In conclusion, the geopolitical uncertainties in the Middle East underscore the importance of diversifying energy sources and enhancing energy security. China’s transition towards renewable energy and decarbonization will require concerted efforts and strategic investments to ensure a sustainable and resilient energy future. By staying informed and proactive, China can navigate the complexities of global energy markets and safeguard its energy interests in the face of evolving geopolitical challenges.