China Weathers Hormuz Crisis With Oil Reserves, Coal, Renewables

More than a week after the Strait of Hormuz was effectively blockaded, plunging the world into its worst crisis since the oil shocks, China is breathing easier. Analysts say the world's largest crude oil importer absorbed the shock through a "two-pronged strategy" of securing six months' worth of strategic petroleum reserves while maintaining traditional energy sources including coal and renewables.

The South China Morning Post reported on the 10th (local time), citing customs data, that China imported 96.93 million tons of crude oil in January and February—a 16% increase from the same period last year.

China's increased oil imports this year are interpreted as a preemptive response to rising Middle East tensions and global supply risks. "As the U.S. was expected to attack Iran, China has been building up its oil and gas reserves since early this year," said Shim Li, senior analyst at the Economist Intelligence Unit.

As of last year, China's crude oil imports stood at 11.6 million barrels per day, accounting for 20% of global oil imports—far exceeding the United States (12%), India (9%), and Japan (4%). China primarily imports cheaper Russian and Iranian crude, recently utilizing informal shipping fleets as U.S. sanctions have intensified.

Given its high dependence on oil from sanctioned countries, China has been closely monitoring Middle East conflicts and steadily increasing its reserves. When Iran attacked energy facilities in the Gulf region and ships passing through the strait, China pressured Iran to guarantee safe passage for Chinese vessels. As a result, only some Chinese-owned tankers are currently passing through the Strait of Hormuz.

According to data provider Kpler, tens of millions of barrels of oil shipped via third countries to circumvent sanctions from Iran, Russia, and Venezuela are loaded on Chinese tankers. China's strategic petroleum reserves are estimated at approximately 1.4 billion barrels—about 3.6 times the U.S. Strategic Petroleum Reserve (SPR). This is enough to last more than six months even if Middle Eastern crude imports are completely cut off.

These reserves have also contained inflation concerns. "The short-term impact is limited and can be mitigated," said Larry Hu, head of China economics at Macquarie Group. He projected that even if crude oil prices rise to $100 per barrel, China's consumer price inflation would remain around 1%.

China's energy mix strategy pursued in recent years also served as a buffer. Maintaining an energy security stance that maximizes domestic resources, China has continuously increased coal production. With abundant coal reserves, China's annual coal production hit a record high last year. While the European Union and the United States have successively regretted or reversed their carbon-zero policies, China has steadily accumulated traditional energy sources including thermal power generation.

Simultaneously, China has established a vast supply chain for manufacturing solar panels and wind turbines, efficiently operating its power network through the world's largest grid. It has also expanded electric vehicle adoption to reduce oil dependence and strengthened energy cooperation with Russia.

Analysts say China's preparations served as a breakwater against the stock market shockwaves from the Hormuz Strait blockade energy crisis. Indeed, China's Shanghai Index fell only 0.7% compared to February 27th, just before the U.S. launched "Operation Grand Fury." This contrasts sharply with stock markets in Asian countries highly dependent on Middle Eastern oil and gas—South Korea (10.2%), Japan (6.5%), and Taiwan (3.8%)—which tumbled significantly during the same period. Despite China importing 40% of oil passing through the Strait of Hormuz—more than India (15%), South Korea (12%), or Japan (11%)—its damage was limited. Bloomberg noted that "China's energy security strategy has paid off."

However, natural gas cannot be considered a "safe zone." Qatar and UAE, currently embroiled in the war, account for about 30% of China's liquefied natural gas (LNG) imports. If the war is prolonged, China could also face natural gas supply shortages. Although China is a gas-producing country with estimated production of about 12 billion cubic meters this year, demand is estimated at more than double that—25 billion cubic meters—due to surging demand for transportation and power generation.

Relative vulnerability to shipping risks is another challenge China must address. Chinese refiners dependent on informal shipping fleets are relatively more exposed to rising freight and insurance costs during logistics disruptions. Whenever geopolitical shocks have occurred—such as U.S. sanctions on Chinese shipping companies in 2019 and the early spread of COVID-19 in 2020—freight rates for large tankers from the Middle East have surged significantly. Freight rate increases are expected to be larger than on other routes in this Hormuz Strait blockade situation as well.

"In the short term, strategic petroleum reserves and a supply system centered on state-owned refiners can partially cushion the oil price shock," said Shin Dong-ju, manager at the Bank of Korea's Beijing office. "However, crude procurement costs could expand not simply through price increases but through surging shipping and insurance costs."