Despite the war with Iran triggering one of the largest — if not the largest — supply shocks in the history of the global oil market, crude prices never reached $150 per barrel, defying the dire predictions analysts had initially put forward.
Having already drawn lessons from the war in Ukraine, governments around the world moved swiftly to implement emergency measures. When Iranian strikes effectively closed the Strait of Hormuz, Gulf oil-producing nations responded rapidly. Abu Dhabi and Riyadh rerouted approximately 5 million barrels per day through pipelines that bypass the Strait. The United States and Japan released around 2 million barrels per day from their strategic reserves, while poorer nations introduced measures to curb fuel consumption.
Beijing’s decisive intervention
Yet the most significant intervention came from Beijing. Between February and June, China slashed its crude oil imports by approximately 5.5 million barrels per day — nearly half of its usual purchases. Analysts estimate that this reduction alone may have pushed Brent crude prices down by $30 or more per barrel. The scale of the move is staggering. During the COVID-19 pandemic, global oil demand fell by roughly 9 million barrels per day as economies shut down and travel collapsed. China’s wartime reduction amounted to more than half of that historic drop.
As The Economist notes in its analysis, this demonstrates that China has acquired a new form of power in global energy markets: the ability to dial oil demand up or down at will.
China may now be “the new OPEC”
For decades, the Organization of the Petroleum Exporting Countries (OPEC) and its allies — collectively known as OPEC+ — have influenced oil prices by controlling supply. By cutting production, the group can restrict the volume of oil available on the market and drive prices higher. China offers the mirror image of that model. As the world’s largest oil importer, it can move prices by controlling demand.
The key difference is that OPEC+ must coordinate decisions across multiple sovereign nations. China’s highly centralized political system allows Beijing to make decisions quickly and implement them across the country’s vast energy sector. As one oil market executive put it, China may now effectively be “the new OPEC.”
The three tools
Beijing has three core instruments at its disposal. The first is its enormous strategic oil stockpile. In the year leading up to the war, when low oil prices fueled talk of a global “glut,” China purchased approximately 200 million barrels of crude, adding them to reserves estimated at around 1 billion barrels. Those purchases may have already pushed global oil prices $10–$20 higher. When the war disrupted supply, China was able to do the reverse. It stopped aggressively replenishing its reserves and began drawing them down. According to The Economist, by July stockpiles had fallen by roughly 70 million barrels — and when other forms of storage are factored in, total drawdowns may have reached approximately 150 million barrels.
The second tool is control over refined product exports. China is the world’s second-largest oil refiner. During the conflict, however, Beijing ordered refineries to stop signing new export contracts and to cancel or scale back certain existing agreements. Between February and April, exports of refined petroleum products fell by nearly half.
The third — and perhaps most remarkable — tool was the reduction of domestic demand.
Chinese refineries processed approximately 2.7 million fewer barrels of crude per day in June compared to the same period a year earlier. Gasoline output fell by 14%, while diesel and aviation fuel production dropped by 21%.
The limits of Chinese power
Consumers responded to higher fuel prices and government policies by cutting back on car travel. Public transport, bicycles, and electric vehicles picked up much of the slack. Domestic air travel also declined, with trains absorbing a larger share of passenger journeys. China’s vast petrochemical industry adapted as well. As raw material supplies from the Persian Gulf — such as naphtha and liquefied petroleum gas (LPG) — were disrupted, producers found alternative ways to manufacture plastics and other materials, turning to coal and ethane instead.
Yet China’s power has its limits. Strategic oil reserves, fuel stockpiles, and industrial inventories are not inexhaustible. Beijing cannot indefinitely sustain import cuts of 5.5 million barrels per day. OPEC+, by contrast, can theoretically maintain production cuts for years, provided its members remain willing and able to do so.
Originally published in MoneyPro by Parapolitika
