How China can survive without the Strait of Hormuz

The world's largest importer of oil through the Strait of Hormuz is, paradoxically, also one of the best placed to weather the waterway's closure.

China consumes oceans of oil from the Gulf and imports roughly as much from the region as India, Japan and South Korea combined.

In response to the closure of the Strait, officials across Asia are asking citizens to take shorter showers or work from home to save energy. In China, the ruling Communist Party's flagship newspaper is instead telling readers the country holds its own "energy rice bowl."

While the editorial does not mention that Beijing has unofficially banned fuel exports to conserve supplies, the country is nonetheless more insulated than many of its neighbours thanks to years of policy measures that have reduced its vulnerability to energy shocks.

China boasts an electric vehicle fleet about as large as the rest of the world's combined, vast and growing oil stockpiles, diversified supplies of oil, and gas and an electricity grid that is almost insulated from imports thanks to domestic coal and renewables. 

"The current situation is really close to what Chinese planners have had in mind for decades," said Lauri Myllyvirta, co-founder of the Centre for Research on Energy and Clean Air in Finland.

"It validates the drive to reduce reliance on seaborne fossil fuels."

The unexpected EV boom

In late 2020, Beijing issued a goal for electric vehicle purchases to hit 20% of new sales in 2025. By last year, sales hit half of all new vehicles.

That unexpected boom in EVs means China's fuel consumption has topped out after decades of breakneck growth. The country is burning and importing less oil than it was expected to just a few years ago.

Oil displaced by EVs last year was roughly equal to what China imported from Saudi Arabia, according to estimates from the Centre for Research on Energy and Clean Air.

An insulated electricity grid

China's electricity grid is powered almost entirely by coal and rapidly growing renewable energy. The boom in clean energy, which has exceeded Beijing's own targets, is such that almost all the extra power the economy requires each year is met with new solar or wind. That means fewer coal imports and less liquefied natural gas (LNG) imported into the handful of coastal provinces where it is part of the electricity mix.

Lots of oil, but many suppliers

China imports lots of oil, but in contrast to other major Asian importers, it is careful to stay independent of any one supplier.

Take Japan: Tokyo normally buys nearly 80% of its oil from Saudi Arabia and the United Arab Emirates. China bought the same share of oil from eight countries, including large amounts of discounted oil from Russia, Venezuela and Iran, which US sanctions place off limits for most buyers.

China also funnels a share of those imports into the storage tanks of its secretive strategic petroleum reserve. No one knows exactly how big the reserves are, but combined with stocks held by commercial refiners, China has enough oil in storage to replace imports via the Strait of Hormuz for perhaps seven months by some estimates.

Domestic production is growing

China produced 4.3 million barrels per day of oil last year, a new record that was equal to about 40% of all oil imports. However, oil reserves are drying up and China is unlikely to replicate the US shale oil boom.

Gas, however, is another story. Domestic production is growing fast enough that, combined with gas imported via pipeline, China is actually importing less LNG than it did in 2020.

China's pipeline network allows it to diversify away from seaborne imports and source oil and gas from Russia, central Asia and Myanmar. Ambitious plans have been proposed for another Russian-China pipeline, the Power of Siberia 2, however it remains years from completion.

A more secure future

For decades China's growth has been fueled by fossil fuels imported from overseas, in particular crude oil. But thanks to the EV boom, China is unhitching its growth engine from foreign oil.

"China's oil demand is likely to peak this year and decline thereafter," said Chen Lin, vice president of oil and gas research at Rystad Energy. "So although the import share will remain high, the situation is unlikely to worsen."