Singaporean oil tanker docked at Dong ying Port in Shandong Province, China (Post on X Dong ying of China)

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With the ongoing military operations in the Middle East; now, more than ever, it is vital to understand the logistics of how sanctioned oil ends up powering the mighty Chinese economy. From the Persian Gulf to the shores of Shandong Province, shadow fleets and teapot refineries are part of a complex geopolitical strategy to fuel Chinese growth.

The Chinese economy has positioned itself as a key player in global trade through its impressive volume and diversity of exports. Its rapid urbanisation has produced products ranging from textiles to solar panels, EVs, consumer electronics, machine components and construction materials. The list undoubtedly goes on, but underpinning all this is a high consumption of oil, a resource of which domestically is growing more difficult to produce. In the future China aims to produce industrial energy supply through renewable sources but, in the meantime, it has to search overseas to fill the gap.

China is the largest purchaser of crude oil, taking in 11.8 million bpd of the roughly 14 million barrels it consumes daily. With 90% coming in via ship, this process of importation presents a great geopolitical complexity. The American dominance of the global oil trade through its control of nearly all oil financial contracts and unilateral sanctions of key oil exporters (namely Iran and Russia) places China in economic vulnerability, a position the Chinese government is actively seeking to mitigate.

The Mandarin word for crisis, weiji, is a compound of the characters for ‘danger’ and ‘moment of change’ and it is precisely this moment where China is challenging America’s control of the global oil trade. The US sanctions of Iranian oil, (which up until this year was the most assertive method to influence Iran) encourage large state-owned companies like Sinopec or CNPC steer clear because interacting with Iranian oil will see themselves cut out of the US financial system and access to the dollar – the de facto foundation of the global oil trade. However, for China, this is a moment of a change amongst the danger, its small privatised ‘teapot refineries’ have seized the opportunity to buy murky oil – in both quality and legality. In doing so, they challenge US hegemony over crude oil.

The oil is loaded from Kharg island in Iran, (it’s primary export terminal) and shipped across the Persian gulf, using false documents of origin. During the course of the journey the oil will be transferred between different ships as to further increase the complexity of tracking the sanctioned oil. Next, it will pass through the now geopolitically ‘tense’ Strait of Hormoz and across the Indian ocean. Now at the Malacca strait, it almost certainly transferred to yet another ship, because the sheer number of ships in the strait makes satellite tracking virtually impossible. Now on a vessel likely registered to Vietnam, Malaysia or Singapore, it will travel up to the ports of Shandong Province, China.

The buyers are the small, often poorly maintained, privately owned ‘teapot’ refiners that distil the oil to be used in the Chinese economy or sold onto the rest of Asia. Because the oil is sanctioned, they leverage this to buy barrels on average for over $10 cheaper per barrel than the standard market rates. Moreover, the lack of state-ownership creates a legal grey zone helps China navigate geopolitical tensions, without direct accountability. Yet, through tax evasion and environmental pollution crackdowns, Beijing still retains tight control of this cluster of refineries in Shandong province.

However, the ongoing conflict in the middle east has revealed the asymmetry to the Iranian-Chinese relationship. China has a broad range of suppliers for crude oil and a strategic reserve to last over 73 days thus shielding it from instability in the Middle East. Moreover, declining investments from Chinese firms and growing rhetoric of dissatisfaction with its instability places Iran in position of danger because it desperately needs buyers of its oil. Despite political competition, China has closer economic and political ties with many of America’s allies in the region thus making the status-quo preferable for all but one great power: Russia.

Russia is in a unique position to gain from this crisis for two reasons. Firstly, it takes US military attention away from Eastern Europe where some of the Patriot air defence systems were transferred from to protect the Gulf States. Yet, more broadly, the increase in the price of oil and loss of a key exporter, enables Russia to increase production – further financing its war in Ukraine. The Russian government has noted a budget deficit due to Urals oil being priced at $44pb, $15 lower than expected. If the disruption to the Persian Gulf continues, Russia and China will be able to take advantage of greater influence over Iran’s Shadow Fleet.

Sources In order or Appearance

On Nov 15, a Singaporean oil tanker smoothly docked at #Dongying Port's 100,000-ton crude oil terminal, marking the commencement of three such terminals of the port and the dawn of the era of a deep-water major port. 🚢⚓️ #DongyingFocus 🌊🛢️ pic.twitter.com/9OsrvpmsQh
— Dongying of China (@iDongying) November 16, 2023