When Trump and Netanyahu started this war, much of the attention in the business world was focused on the price of crude oil (Brent, WTI) and the derivative products (gasoline, diesel, fertilizer, plastics). When the Strait was closed and then reopened via the MOU, prices fluctuated accordingly, but what has been of most interest to me is that the market prices of those materials have not continued to rise as much as might be expected.
Everyone who tracks the news knows that the U.S. and other countries are tapping their "strategic petroleum reserves" stored underground (some small countries don't have such and are suffering disproportionately).
The second group of factors that mitigated price rises was increased use of alternative energy, restrictions on energy usage, increased production in non-Gulf nations etc.
But from near the beginning, I heard analysts on Bloomberg say that China was modifying its policy on oil. China apparently has immense reserves of stored oil, but were still net oil importers (see chart above for 2016-2026). After the war started, they have markedly decreased their importation of oil, apparently using some of their reserves and altering domestic policies toward conservation.
Why? In part, it's basic economic good sense when the Brent price goes from 50 to 90 to cut purchases. But this is a super-smart country with well-thought-out international policies. They also have a sort of alliance with Iran, which I believe was one of their sources for imported oil in recent years. By cutting their daily imports from 12 million to 7 million they buffer the world's loss of I think 5 million a day that was passing Hormuz.
Is it in their best interest (remembering that they think years/decades in advance, not election cycles) to keep the oil price rise modest so as not to harm the economies of the world they export to? Or do they want to keep the price down because a huge price rise might cause the U.S. to stop the war and they would rather the war go on longer so the U.S. depletes its own reserves and the continuation of the war leads to more and more destruction of the U.S. military capabilities? I suspect the latter, because I think there is way more erosion of U.S. capabilites in the Gulf than Washington has (or will) admit.
Also note that Iran wants to charge fees for transit of Hormuz and that those fees would be paid in Chinese yuan, not U.S. dollars. (a relevant WSJ article is behind a paywall) This was is weakening the U.S. military capabilities, depleting strategic petroleum reserves, ruining the U.S. diplomatic status around the world, and causing unhappiness and political dissent within the U.S. China has a lot of control over how this will unfold. Stay tuned.
Image via Axios.
Addendum August 8: The Atlantic (online) has posted a detailed discussion of this topic, basically confirming what I speculated above. Herewith some brief excerpts:
Before the war, China, by far the world’s largest oil importer, was buying more barrels than the entire European continent and almost twice as much as the second-largest importer, the United States. Then, weeks after the conflict broke out, the country abruptly slashed its oil purchases, eventually cutting them by half compared with prewar levels. That appears to be why global prices have risen so much less than experts predicted. The shift also poses mysteries of its own. No one outside China knows how exactly the country has managed to meet its energy needs while forgoing imports, nor why its leaders chose this course. And no one knows how long the situation can last...The amount of oil that China stopped buying, about 5 million barrels a day, represented about a quarter of what was lost when the strait closed and is equivalent to the entirety of imports to India, the world’s third-largest importer. This significant and unexpected drop in Chinese demand freed up those barrels to go elsewhere, preventing the kind of shortage that might have led to truly catastrophic prices...A more realistic possibility is that China has been tapping into its immense oil reserves, which it has spent years accumulating in the case of a crisis. But the giant outdoor tanks where China keeps much of its known oil reserves have remained full since the war began. This fact has given rise to yet another theory: On top of its known reserves, perhaps China has been stashing oil, as well as refined diesel and gasoline, in secret facilities, which it is now using to keep its economy running. “I sometimes feel like I should put on a tinfoil hat when I start talking about this,” Johnston said. “We have almost no evidence of it. And yet, it’s really the only explanation that makes any sense.”...Whatever China’s exact motivations, the country has demonstrated yet another source of power it can wield on the global stage. As long as the Iran war continues, China’s leverage over oil prices gives it the ability to inflict immense pain on American consumers, and really the entire world, at a moment’s notice. Even if China doesn’t choose to do so, the fact that it can might be enough to give the country even more sway over international affairs. “For the last 50-plus years, whenever there was an oil shock, the first thing the U.S. president did was call Riyadh to try to persuade the Saudis to help out,” Jason Bordoff, the founding director of Columbia’s Center on Global Energy Policy, told me. “Maybe the place everyone needs to call now is Beijing. That’s a very powerful position to be in.”
I have said (or implied) in my writings for TYWKIWDBI that if the last century was an "American century" of global power, the next one will be a Chinese one, based both on "soft power" (exemplified above) and now I believe also in terms of military power.
