China Implements Five Technological Solutions Amid Hormuz Instability

By Michael Kern for Oilprice.com

The temporary ceasefire between the United States and Iran, which had been expected to permanently reopen the Strait of Hormuz, is now disintegrating. U.S. forces have reimposed a blockade on Iran's ports this week and attacked dozens of targets along the country's coastline, while Tehran has responded by attacking oil tankers passing through the strait without their permission.

Brent crude oil prices, which had fallen to around $70 per barrel while the June peace agreement was in effect, have rebounded above $85 per barrel following this news, the highest level since the armistice was signed. This marks the second time this year that the market has had to price in the potential shutdown of one-fifth of the world's seaborne oil transport. The first time, in February, analysts had forecast oil prices could reach $200 per barrel but never reached that level. Much of that can be traced back to Beijing rather than the Gulf, and it's the same reason being tested again this week.

Shifting from Self-Driving to Taxi Services

In China's largest cities, taking a taxi is now often cheaper than driving a private vehicle, even as fuel prices increase weekly. The public made 305 million trips via taxis and ride-hailing services in May, a 6% increase from the same period last year, and this reason has little direct connection to the war.

A weak labor market has driven a wave of new drivers into ride-hailing services just to make a living, and a wave of affordable electric vehicles has made becoming a driver easier, resulting in continued fare declines even as fuel costs rise for anyone still driving themselves. Li, a part-time driver in Beijing who has been doing the job for six months, told Reuters that his fares have decreased by 10-15% since he started.

"The competition is fierce," he said. On the other side of that transaction, a 45-year-old woman who owns a gasoline car, who only gave her surname as Yang, said she would take a taxi instead of driving herself whenever fuel prices rose high, as she wouldn't have to find parking or pay for gas.

Electric Vehicle Strategy and Impact on Fuel Demand

This fare war is being added to a taxi fleet that was already predominantly electric, causing fuel figures to change rapidly. About half of China's 1.3 million taxis run on batteries, and in the largest cities, that rate is nearly 100%. Didi's non-fossil fleet, including hybrids and electric vehicles, grew to 8 million vehicles last year and now accounts for three-quarters of the app's total mileage.

Collectively, China consumed 10% less gasoline and 14% less diesel in May compared to the same period last year, even as road transport increased by 2% and traffic hit record levels during the May holiday. As Daizong Liu of the Transportation and Development Policy Institute put it, the demand for travel continues to increase, it's just shifting to taxis and subways instead of personal cars.

Billions of Barrels in Reserve: Timing and Cost

The larger, more deliberate actions have been in place long before the fighting began. For over a year, Chinese refineries have been buying more crude oil than needed, taking advantage of stable prices and deep discounts on sanctioned Russian and Iranian oil that few other buyers wanted.

No one outside Beijing has exact figures, but analysts estimate this accumulated reserve reached nearly 1 billion barrels in commercial and strategic storage when the war began in February. Since then, Beijing has used it. Crude oil imports fell from 11.39 million barrels per day in February to 6.36 million in May, a drop of more than 44%, while refineries continued to operate near normal levels. That gap came directly from storage reserves; the International Energy Agency (IEA) estimates China drew 41 million barrels from its storage just in June.

"China has put a price floor," Janiv Shah of Rystad Energy described this accumulation to CNN. That price floor has become a genuine shock absorber once the fighting broke out. Whether it can perform the same work a second time is another question. The use doesn't automatically refill, and J.P. Morgan is now debating whether China's demand decline will ever reverse, or if it's moving closer to a permanent change in the amount of oil the country needs.

Pipelines Beyond War's Reach

Two decades of pipeline construction through Russia and Central Asia mean that Hormuz now only transports 40-50% of the country's seaborne oil imports, according to Rush Doshi, director of the China Strategy Initiative at the Council on Foreign Relations, who noted Beijing has "spent the last 20 years reducing some of the dependence on sea oil."

Oil moving on land isn't intercepted by the Revolutionary Guards, doesn't require war risk insurance, and doesn't care if Iran places mines where it's supposed to be guarded. Russian gas moving through the Power of Siberia pipeline follows the same logic, though it's not infinite. Those pipelines are already near capacity, and Russia doesn't have enough of its own tankers to make up the difference by sea even if it wanted to.

Analysts at OCBC argued in March that this type of diversification would leave China less affected than its Asian neighbors to a prolonged Hormuz shutdown. That argument is being tested in the real world again this week, with the strait effectively contested and both sides engaged in combat.

No Competing for Stranded Iranian Oil

Iranian vessels are essentially the only ones still guaranteed passage through the strait, and nearly all of that oil heads to China, which buys about 90% of everything Iran exports. You might think Chinese refiners would be desperate for it. They aren't, particularly. When Iranian goods accumulated during the brief ceasefire, buyers mostly walked away rather than compete for them.

For example, private Shenghong Petrochemical bought about 12 million barrels of crude from Iraq, UAE, and Saudi Arabia for July delivery, once Gulf producers cut their own prices to move barrels. Iranian imports into China are forecast to drop to around 556,000 barrels per day in July, the lowest since early 2023, with 30-34.5 million barrels of Iranian oil floating in storage with no buyers arranged.

Natasha Kaneva of J.P. Morgan put it bluntly in a note to clients this month, writing that barrels leaving Hormuz "have increasingly nowhere else to go other than China. But China isn't buying." When the world's largest oil importer can be this selective, they're not taking the price the market gives them. They're setting a price.

The Great Transition Already Underway

One of every two new passenger cars sold in China today is a new energy vehicle. Exports of clean tech, solar panels, batteries, electric vehicles, hit a record in March, just as the Iran fighting began. Beijing's goal alone is to push non-fossil fuels to 25% of total energy consumption by 2030, up from about 22% last year, with or without war.

J.P. Morgan analysts wrote earlier this month that the conflict may simply have accelerated behavioral changes already underway, leaving China less dependent on oil than the market had assumed when it began. Whether that can survive through a second round of attacks and blockades is the real question hanging over this week's price surge.

Don Striven of Goldman Sachs has floated the idea that a meaningful portion of China's import collapse, perhaps a tenth of it, may never fully return, ceasefire or not. If he's right, then whatever happens to the strait in the coming weeks, the country that has quietly built five layers of protection over many years may ultimately need less oil than the world has budgeted for. Permanently.