Executive Summary
In response to the closure of the Strait of Hormuz, China cut back oil imports by 40%, a feat most analysts did not anticipate. The dramatic reduction in Chinese oil imports has had a negligible effect on the Chinese economy, in contrast to acute fuel shortages in South and Southeast Asia. These facts indicate that the size of China’s oil reserves – a state secret – may be sufficient to sustain China through a protracted conflict. In other words, China may have solved the “Malacca Dilemma” – its dependence on the Strait of Malacca for 80% of its oil imports, which could be choked off in a crisis and grind the country’s economy and warfighting ability to a halt.
Key Points
- After the closure of the Strait of Hormuz, some analysts expected a severe oil shock and global economic crisis if the conflict did not resolve quickly.
- China reduced purchases by 40% relative to a year before – an unexpected feat – but China’s economy has not been severely affected.
- Analysts now estimate that China’s strategic and commercial oil reserves may be 1.4 billion barrels.
- These large reserves – far larger than publicly disclosed prewar U.S. reserves (415 million barrels) – could sustain China for six months without oil imports, reducing China’s short-term vulnerability to a U.S. closure of the Strait of Malacca in a U.S.-China conflict scenario.
Analysis
After the U.S. and Israel attacked Iran on February 28 and Tehran closed the Strait of Hormuz, analysts expressed concern that a protracted conflict could drive up oil prices, spur a new wave of inflation, and cause a global recession.
Though oil prices have spiked above $100 a barrel repeatedly as the conflict has stopped and started again, causing an energy crisis in South and Southeast Asia, the worst of the anticipated oil shock has yet to materialize. Trans-Arabian pipelines bringing Persian Gulf oil to the Red Sea and Gulf of Oman have eased some of the supply pressure, but a major factor which has mitigated global shortages has come from the demand side: China reduced imports by around 40%.
Notably, the impact on China’s domestic economy has been marginal, indicating that China has vast domestic supply to draw on. Though the size of China’s oil reserves is a state secret, estimates based on satellite imagery suggest that China’s pre-war reserves stood at around 1.4 billion barrels – over 3.5 times the size of pre-war U.S. reserves. China’s reserves may be even larger, given that reserves stored in underground caverns are not observable from space.
China’s dependence on foreign oil imports – 80% of China’s oil imports flow through the Strait of Malacca – has been a public concern of China’s leaders since 2003, when then Chinese President Hu Jintao coined the term “Malacca Dilemma.” China’s push for transportation electrification and rapid expansion of renewable, nuclear, and coal generation at home has been, in part, to reduce the country’s exposure to foreign oil.
Decades of oil stockpiling have been the less visible counterpart to those efforts – until now. By dramatically cutting imports, China has spared other countries – especially its main export markets – an even worse inflationary hit. But in doing so, Beijing has also revealed that the United States no longer has the same ability to sever China’s access to energy, as Washington might seek to do in a crisis over Taiwan.
Implications
- Diminished U.S. leverage over Malacca does not necessarily make a Chinese invasion of Taiwan or other risk-seeking behavior more likely.
- It does, however, show that U.S. strategy in such a conflict cannot rely on crippling Chinese oil imports to quickly halt the war at (relatively) low cost to America.
- China is more capable of fighting a protracted conflict with the U.S. if it chooses, meaning any U.S. decision to intervene in a Taiwan crisis could carry significantly higher risks for U.S. personnel and military hardware.