China's Influence on Global Oil Prices Without Direct Purchases Explained.

The world's largest oil buyer is China, yet just three months into the conflict with Iran, it drastically reduced its oil imports, stabilizing the global market.

The disruption to global oil supplies following the war in Iran led to a significant price hike, with crude oil briefly touching nearly $120 per barrel. However prices failed to skyrocket further despite dire predictions of $200 oil, instead stabilizing at lower levels.

Oil prices have surpassed the $80 mark per barrel, reaching an elevated level. The current price is significantly higher than it could potentially reach.

China's significant impact stems primarily from it.

China's massive influence on global oil prices stems from its significant reduction in imports despite being the world's largest buyer. Prior to the conflict, China imported an average of 11.6 million barrels daily. By May, its overseas oil purchases plummeted to a staggering eight million barrels per day, marking its lowest level in over eight years, as revealed by Beijing's customs data.

As the US and Iran announced a tentative peace deal, sending oil prices plummeting to a three-month low on Monday, industry insiders pointed out that China's influence on the global market remains substantial nonetheless.

According to Jason Bordoff, the founding director of the Center on Global Energy Policy at Columbia University, China's decreased oil imports are a crucial factor preventing oil prices from skyrocketing currently.

Global oil markets have suffered significantly, with over 14 million barrels lost daily following the US-Israeli military operation against Iran on February 28. This drastic reduction in supply was triggered by Iran's decision to close the critical Strait of Hormuz, resulting in a severe oil shortage.

Global energy markets experienced a significant shift as a result of China's influence. Gasoline sales plummeted due to decreased demand, while governments implemented mandatory power outages. Air travel was also severely impacted by reduced flight schedules and lower jet fuel consumption.

Reducing import demand was a key strategy employed by China. By tapping into massive domestic oil reserves, significantly larger than those of most other nations, Beijing effectively mitigated its reliance on foreign supplies. This move coincided with internal production cuts and increased coal usage, as noted by Michal Meidan, China energy expert at the Oxford Institute for Energy Studies.

China's absence from direct purchases in the oil market has thus far constrained significant price hikes.

China's emergence as a global leader in renewable energy has had far-reaching implications worldwide recently.

US oil production has surged to unprecedented heights over the past three months, contributing significantly to downward pressure on global prices. Meanwhile, a small but steady stream of crude continues to flow out of the Persian Gulf, facilitated by land pipelines and tankers willing to navigate around Iranian tolls and avoid detection by disabling their transponders.

China's reduced oil purchases are having a disproportionate impact on stabilizing global oil prices.

China's actions in 2022 mirrored those taken during Russia's invasion of Ukraine: it restricted diesel and gasoline exports, reserving more for domestic consumption. Following the outbreak of war, China instructed its state-owned energy firms to halt exports temporarily, instead tapping into domestic reserves and diversifying its energy sources to meet demand.

Beijing's strategic reserve has given it the flexibility to delay entering the global oil market until prices decline. According to Muyu Xu, senior oil analyst at Kpler, China is poised to withdraw approximately one million barrels daily from its commercial stockpiles over a two-month period.

China's reserve capacity allows for continued tapping until next year without depleting its official strategic stockpile, valued at approximately 1.23 billion barrels. The authorities in Beijing are hesitant to exhaust these reserves, as it would undermine the progress made towards securing a stable energy supply over several years.

China's rapid expansion of electric vehicle production and investment in renewable energy sources has led to a significant decrease in its consumption of traditional fossil fuels such as gasoline and diesel.

China boasts an impressive lead in renewable energy sources, boasting nearly double the global total for both wind and solar power installations. Its dominance extends to the automotive sector, where it manufactures and exports a significantly higher number of electric vehicles worldwide.

China's rapid growth in clean energy sectors was pivotal in stabilizing its greenhouse gas emissions last year. As the globe's biggest annual polluter, China must reach a peak and start reducing its carbon footprint swiftly if global warming is to remain manageable. Beijing's aggressive expansion of wind, solar, and electric vehicles has not been driven by the need for emission reduction, however.

Mathias Larsen, a senior policy fellow at the London School of Economics' Grantham Research Institute, attributes China's focus on renewable energy to its primary concern: achieving energy security rather than solely addressing climate change issues.

China's vulnerability to global oil prices has decreased significantly due to a shift in energy costs, with renewables now outpacing fossil fuels, particularly imported gas and oil, which were previously driving market fluctuations post-Iran conflict.

China's oil demand has been substantially reduced due to the widespread adoption of electric vehicles, resulting in tens of millions of tons of gasoline being displaced. The country's high-speed rail network has also seen significant growth, with Beijing at its forefront. In April, 421.7 million passengers utilized the railways, marking an 11 percent increase from the previous year and a seasonal record for usage.

China's sustained initiative has finally given it a solid foundation to gradually decrease its oil usage, according to Li Shuo, director of the China Climate Hub at the Asia Society Policy Institute.

China's stockpiles are finite, and their utility is limited by time. The prolonged closure of the Strait of Hormuz poses an unknown duration for maintaining decreased oil imports, according to Logan Wright, head of China markets research at the Rhodium Group consultancy.

A rebound is imminent, but not in the immediate future, likely extending beyond six months. This turning point will serve as an indicator that global oil prices may soon surge again.

Researcher Murphy Zhao is based in Hong Kong.