China’s energy strategy delivers as Mideast war squeezes supplies

China’s push to diversify energy sources and build stockpiles is helping it weather fallout from the Iran war, even as some sectors continue to face major constraints, analysts say.

China is a net importer of oil and more than half of its seaborne crude came from the Middle East last year, according to analytics firm Kpler.

The conflict triggered by Israel and the U.S. against Iran has halted almost all shipments from the Gulf area for six weeks now, with a shaky cease-fire deal struck this week extremely unlikely to lead to an immediate recovery.

However, Beijing’s long-running prioritization of energy security has left it well-prepared for such shocks, analysts told Agence France-Presse (AFP).

A “general concern about the geopolitical situation” in recent years has spurred Chinese leaders to ensure sufficient storage construction and stockpiling of strategic reserves, said Muyu Xu, senior oil analyst at Kpler.

Those efforts mean China now sits in a far better position than several of its Asian neighbors, such as Japan and the Philippines, she said.

But so far, Beijing has not been “in a rush” to initiate releases from its substantial strategic reserves, said Xu.

‘Vindicated’

This is partly because China’s decades-long mission to diminish its traditional reliance on coal and fossil fuels is beginning to flourish.

The large-scale efforts to transition to renewable energy mean “China is relatively well placed” to deal with the current situation, said Lauri Myllyvirta, co-founder of the Centre for Research on Energy and Clean Air.

Wind, solar and nuclear capacity have been added to China’s populous coastal provinces, while improved grid infrastructure carries electricity to them from inland.

“There would be much more oil and gas imports needed to power those provinces otherwise,” said Myllyvirta.

While dependencies still exist, including in the vast manufacturing sector, renewable energy is “helping a lot on the margin”, he said.

Li Shuo, director of the China Climate Hub at the Asia Society, told AFP that the current energy crisis “vindicates China’s long-standing ‘all-of-the-above’ strategy.”

Chinese President Xi Jinping is seeking to leverage the renewables build-out even further as geopolitical turmoil mounts.

State broadcaster CCTV aired a segment on Monday in which Xi was quoted as calling for accelerated construction of a “new energy system” to safeguard energy security, although it did not mention the Middle East war.

‘Teapot’ trouble brewing

For Beijing, the “more serious risk” is not immediate energy shocks but a potential global economic downturn caused by the conflict, the Asia Society’s Li said.

Some sectors will inevitably feel the pinch, presenting new hurdles for leaders struggling to jumpstart sluggish activity.

Among them are “teapot” oil refineries, small, private outfits that have historically benefited from access to sanctioned Iranian and Venezuelan crude acquired at a discount.

The loss of Iranian crude could be a death knell for many of these operations, which are mainly concentrated in the eastern province of Shandong and are already reeling from Washington’s military intervention in Venezuela this year.

Beijing likely has “mixed feelings” about that, Kpler’s Xu told AFP.

On the one hand, teapots account for around one-fifth of China’s refining capacity, also providing substantial employment, she said.

However, their lax environmental standards, less predictable tax generation and competition with state-owned giants means that their shutting down is “not entirely bad news for China,” said Xu.

Chipmaking, which Xi has declared a strategic priority, is another sector likely to encounter challenges as the Strait of Hormuz remains shut.

Qatar is one of the world’s few large-scale producers of helium, which is vital for semiconductor manufacturing and supplies have ground to a halt since the war began.

The chemicals industry could also face “significant pressure” from the disruption, Michal Meidan from the Oxford Institute for Energy Studies wrote in a recent report.

On a national level, though, she said, “the impacts can be smoothed out.”

“While the economy will not be immune to higher prices and reduced economic activity, stakeholders are already taking pre-emptive measures in case the disruption is protracted,” she wrote.

DAILYSABAH