China won’t waste its reserves to cushion oil price impact of Iran war

Oil prices are set to rise once more as renewed US attacks on Iran leave the Strait of Hormuz, a major artery of oil trade, closed again. With US strategic petroleum reserves at their lowest in over 40 years, America will have trouble keeping oil prices below US$100 a barrel, as it has mostly done in the war so far. Analysts warn that sustained oil prices above US$100 risk accelerating inflation, depressing consumption and inviting recession. They have also turned their attention to China and its ability to cushion oil prices. China is the world’s largest oil buyer and its strategic petroleum reserves – which are not publicly declared, unlike America’s – are thought to be among the world’s largest. Since April, China has been cutting imports by 3.5 million barrels a day, helping to keep a lid on prices. But recent talk of Beijing withdrawing the “safety net” or “cushion” for oil prices appears to be laying the groundwork for blaming China when prices rise – which they are likely to do. China is unlikely to run down its petroleum reserves to keep oil prices low when this could now prolong the war and the interruption to global energy supplies. The worst-case scenario is a multi-year disruption of oil flowing through the Strait of Hormuz and the Bab al-Mandab Strait. Don’t hold your breath for China cutting oil imports further. No war the United States launched on the Middle East has ever been short – the current one is unlikely to be the exception. Granted, America’s warring capability has been substantially diminished by the conflict and its precision munition stocks are very low. But while it is unlikely to sustain massive bombing campaigns, it can still initiate sporadic bombing to pressure Iran. The war can continue for a long time at low intensity. For China, the rational strategy is to ensure it has petroleum reserves to last a year or longer. After a stockpiling drive, China was estimated to have amassed 1.3 billion-1.4 billion barrels at the war’s outset. In cutting imports by 3.5 million barrels per day, China was probably absorbing about a third of the reduction in global supply flowing out of the Strait of Hormuz. But it would be irrational to expect Beijing to do more to make up for Washington’s inability to release more of its own reserves to cushion the price impact from a war it started. Iran’s strategy is plain: cut oil supply and force prices up to pressure the US. If oil prices rise high enough, say to around US$150 – last seen in the global financial crisis – for a month, it could trigger a series of events that finally pop the US artificial intelligence stock bubble. The resulting financial crisis would cripple the US economy and its ability to wage war. This may well be the only path to a durable peace in West Asia. Hence, high oil prices could be in China’s interest. Peace in the Middle East is good for the global economy and thus China’s economy. The temporary cost of an oil price spike could be worth it. If, however, China decided to help the US and expend its reserves to keep the oil price from surging above US$100, the global economy would continue to suffer for longer. China’s long-term goal is to develop markets in the Global South. But many of these countries are often also the first to be priced out when oil prices stay high for longer. The resulting political and social instabilities could throw them off their growth path for many years. This would go against China’s national interests. Further, Beijing needs to prepare for the worst-case scenario – lasting damage to Middle East oil production infrastructure. If the US becomes desperate enough to target Iran’s oil infrastructure, Tehran would respond by doing the same to Gulf producers. As much as one-fifth of the global oil supply could be taken offline for a decade or longer. China’s petroleum reserves wouldn’t be sufficient in such a scenario. But making the stockpile last would buy time for China to develop energy alternatives. The electrification of mobility takes time. The coal chemistry industry may need to expand dramatically – to convert coal into much-needed liquid fuel, clean gas, plastics, chemical fertilisers and more. One such technological zone in Xinjiang sits atop 390 billion tonnes of coal reserves. Given enough time, China could replace its entire demand for Middle Eastern oil with coal chemical engineering. The global economy has been severely disrupted for the past decade. But productivity gains from new technologies have kept it growing. At some point, new technologies will help the world skirt all man-made restrictions and disruptions. The global economy will then enter another golden age.

China won’t waste its reserves to cushion oil price impact of Iran war

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}On the contrary, conserving strategic reserves and letting prices spike in the short term may bring long-term benefits

On the contrary, conserving strategic reserves and letting prices spike in the short term may bring long-term benefits