Although China is the world’s largest crude oil importer, the share of oil consumption in the country’s total energy consumption is only 20%, a figure significantly lower than most major economies (40% for the EU, Japan, and the United States) and emerging markets. Its transition to electricity use in the transport sector and the increase in renewable energy capacity, while keeping coal plants operational, have contributed to reducing oil demand. Additionally, energy efficiency has improved significantly over the years. China’s reduction in energy intensity, amounting to 40% over the last 20 years, has been among the fastest. Binding numerical targets, starting from the eleventh five-year plan in 2006, have supported this initiative. Coal use for electricity generation remains high but has already peaked in 2024, with a significant share of renewables supporting the growing electricity demand.
China imports about 70% of its oil needs, while domestic production covers the rest. Total crude imports amount to around 11-12 million barrels per day (bpd). About half of the oil imports come from the Middle East, excluding Iran. Imports from Russia, China’s main supplier, have increased in recent months, bringing total oil imports, immediately before the war began, to the highest level in recent years. Although oil reserves are not officially published, industry experts estimate that China holds about 1.2-1.4 billion barrels. This figure includes both strategic reserves and commercial stocks and is roughly equivalent to 100 days of total oil imports. Since China has lost about half of its total oil imports, oil reserves could probably last about 200 days without imports from the Middle East. Furthermore, China maintains “partnership” relations with Iran. If the war were to ease and Iran controlled the partial opening of the Strait of Hormuz, Chinese tankers would likely be able to pay Iran transit fees through the strait. Neither Iran nor China has published recent data on Iranian oil exports to China, but industry experts suggest it is about 1.3 million barrels per day. This figure is likely already included in the numbers of other countries (such as Malaysia).
According to the International Energy Agency, about half of China’s oil consumption is destined for the transport sector. This is a lower percentage than that of the United States and the European Union. About 30% is used for non-energy purposes, where the petrochemical industry is the main user. Increased transport and logistics costs will be inevitable and will curb domestic demand. For retail end-users, the Chinese government manages a price smoothing mechanism aimed at mitigating the impact of price fluctuations. The price band allows retail prices to fluctuate only within this range, limiting the negative impact of global oil price swings. It is no surprise that, while the Chinese Producer Price Index (PPI) is correlated with oil prices, the pass-through to the Consumer Price Index (CPI) is limited, as seen in the 2022 episode. The negative impact on households will therefore be mitigated as retail prices adjust gradually and the rise in oil prices cascades through industrial supply chains and logistics links. Moreover, the central government and its state-owned enterprises have the capacity to absorb some of the higher costs at the industrial level.
A positive aspect of this situation is that electric vehicles, batteries, solar panels, and other renewable energy-related products will be in high demand worldwide. Exports of these goods have already surged in January and February and are expected to increase further. Higher foreign demand for these products could partially offset the negative effects of rising energy prices on domestic demand. Although this will not reduce China’s external imbalances, it will support the country’s growth this year. Finally, the war broke out just as the Chinese economic cycle was beginning to show signs of improvement. All monthly economic indicators surprised on the upside, and most manufacturing and non-manufacturing PMI indices recorded an increase. In fact, the economic surprise index reached its highest level since the post-Covid recovery.
