China's Reduced Oil Purchases Are Keeping Global Prices Down Amid Geopolitical Tensions

Global oil prices are significantly lower than anticipated, even with the ongoing closure of the Strait of Hormuz, a development the International Energy Agency described as the most severe oil supply shock in history. Analysts had predicted oil prices could surge to $200 a barrel, potentially leading to gasoline prices of $6.50 to $7 per gallon. However, oil is currently trading below $90 a barrel, and prices have not exceeded approximately $114, far from the peaks seen after Russia's invasion of Ukraine in 2022. Gas lines reminiscent of the 1970s have not materialized.

Several factors are contributing to this market stability. Alternative pipelines and covert shipments are still allowing oil to leave the Middle East. Oil-producing nations not reliant on Hormuz, notably the United States, are increasing production, and many countries continue to draw from their strategic reserves. However, a significant and unexpected driver is the substantial reduction in purchases by China, typically the world's largest crude oil importer.

China's oil imports have dropped from around 11.6 million barrels per day to approximately 7.8 million, the lowest level since 2017. This decrease means millions more barrels per day are available for other countries to import. Rory Johnston, an oil market researcher, noted that this reduction resembles the demand collapse seen during China's COVID-zero lockdowns, but without corresponding news of renewed economic restrictions. Data on industrial output, vehicle traffic, and pollution indicates China's economy is functioning normally. While significant investments in green energy and electric vehicles may be helping, they do not fully account for the scale of reduced oil imports.

Instead, the situation appears to be the result of a longer-term strategy. In 2023, analysts were puzzled by China's increased crude oil imports and refinery output of gasoline and diesel, despite a slowing economy, suggesting excess fuel that was not immediately needed. This stockpiling may now be contributing to the current market conditions.

China's government has not provided an official explanation for its reduced imports during the current conflict, nor has it acknowledged doing so. U.S. Energy Secretary Chris Wright suggested China might be releasing oil from its strategic petroleum reserve. However, Johnston pointed out that China's visible strategic reserve tanks appear full, suggesting the oil may be sourced from large, non-visible underground reserves or from mandated stocks held by state-owned commercial companies. Estimates of China's oil reserves range from half a billion to 1.5 billion barrels, potentially allowing the country to maintain its reduced import levels for months.

The motivations behind Beijing's policy are subject to speculation. One theory suggests a potential agreement between President Donald Trump and Chinese President Xi Jinping during a meeting in May, where China would reduce imports, benefiting Trump politically. However, it is considered unlikely that Xi would agree to support actions against an ally, or that Trump would not disclose such a significant concession. A more probable reason is China's interest in preventing a severe economic crisis in its key export markets.

Regardless of intent, China's actions may be inadvertently prolonging geopolitical tensions by reducing pressure on global oil prices. Trump's urgency to reopen the Strait of Hormuz might be less if oil prices were higher, which would place more pressure on American consumers during a critical election year. While attention is paid to Chinese military aid to Iran, its energy policies may be providing greater indirect support to the U.S. by stabilizing global markets.

Beyond the immediate conflict, China's role as a "swing consumer"—the ability to significantly influence global energy markets through its purchasing decisions—signals a shift in global economic power. This contrasts with the era when Saudi Arabia acted as the primary "swing producer." China could theoretically increase demand and drive up prices, demonstrating its growing capacity to weaponize its economic influence.

Furthermore, China's practice of stockpiling, evident in its past acquisitions of oil, strategic metals, and even pork, has fueled speculation about preparations for major global crises, such as a potential invasion of Taiwan. This strategic positioning suggests China may be more insulated from, and capable of causing, significant global trade disruptions than previously assumed.