The World Is Responding to Iran by Becoming More Like China

Much of the world — or at least much of Asia — seems to be responding to the energy stress caused by the Iran War by attempting to reshape itself in China’s image.

The oil, refined products, and natural gas that is supposed to be flowing through the Strait of Hormuz was largely destined for Asian countries, which are now learning a harsh lesson in the dangers of foreign fossil fuel dependence.

One country whose economy has been relatively resilient to the crisis, however, is China.

That’s despite the fact that China is the world’s second-largest consumer of oil (and its largest importer) and its third-largest consumer of gas (and largest consumer of liquified natural gas). But it has not seen the same type of immediate crisis that other Asian energy importers have. It may be the No. 1 customer of oil coming through the Strait of Hormuz (and especially Iranian oil, which is still flowing), but its main policy adjustment the government has made since the United States and Israeli attack has been to limit exports of refined products. It also came into the crisis with stockpiles of oil estimated at 1.4 billion barrels, more than three times the amount of oil the International Energy Agency coordinated the release of.

In the short run, many Asian countries, especially poorer ones, are embracing energy use restrictions, including limitations on driving and raising temperatures in government buildings, while some richer countries are able to increase supply by rebooting nuclear plants and upping capacity limitations on coal-fired power plants.

In the longer run, several countries are making investments in energy sources that are less dependent on imported fossil fuels. In Vietnam, the developer behind a planned liquified natural gas project asked the government to allow it to instead build a solar and batteries project. The Southeast Asian nation also inked a deal with Russia to work on its first nuclear power project.

There’s also early data of bottom up as well as top down embracing of electrification, with exports from Chinese EV juggernaut BYD increasing and “bustling showrooms across Asia,” Bloomberg News reported.

This has largely been China’s playbook. China’s energy policy has seen huge pushes in electrification, renewables, and clean energy, both at home (38% of its electricity comes from clean sources, and it’s responsible for more than half of world solar and wind capacity additions) and abroad, where China is the leading supplier of solar panels, batteries, and electric vehicles, and has made deliberate efforts to dominate global supply of clean energy technology through exports.

But the country is not pursuing a crash decarbonization policy in order to bring emissions down as fast as possible, in line with global targets. Instead, as Heatmap’s Robinson Meyer and Lauri Myllyvirta of the Centre for Research on Energy and Clean Air explained on a recent episode of Shift Key, China’s energy policy is based around several goals, some of which line up with decarbonization, and some of which don’t.

The first is energy security, and specifically mitigating dependence on seaborne imports of fossil fuels, which can mean both stockpiling oil and embracing renewables. The second is domestic air quality, which means strict particulate pollution policies, moving heavy industry closer to power sources in the south and west of the country and away from large cities in the east, and seeking to replace coal home heating with natural gas. And the third, as Myllyvirta put it, is “wanting to make sure that China has technological leadership [and] market leadership” in the energy technologies of the future, which can explain the industrial policy efforts around solar, batteries, and electric vehicles and their development into world-leading export industries.

This is also an approach to energy policy that’s perfectly consistent with burning and buying a lot of fossil fuels, as many Asian countries are looking to do today, with coal utilization going up as countries scramble to find new sources of imported natural gas.

Several energy analysts have forecasted that China’s experience of the Iran crisis will lead to increased stockpiling worldwide, and thus become a new source of incremental demand for oil, even if global demand for oil in transportation plateaus or falls.

“Countries that have been building their strategic storage — most notably China — look prescient today. Others may respond by starting to do the same,” a team of Morgan Stanley analysts wrote in a note to clients in the early weeks of the Hormuz crisis. “On paper, that is ‘inventory building.’ In practice, it behaves like incremental demand: persistent buying on dips, greater willingness to pay for security of supply, and a higher floor under the price distribution than we assumed before the Strait went quiet.”

And you can’t build stockpiles of oil to cushion disruptions to global trade without buying the oil in the first place. Those stockpiles presume that your economy maintains some base-level dependence on oil, which has become increasingly undesirable of late. China is also investing heavily in the coal-to-chemical sector, using coal as a feedstock for petrochemicals instead of oil or natural gas, which is carbon-intensive in the extreme.

Other countries are looking in the short run to increase coal output. While China has a largely domestic supply of coal, there are fewer bottlenecks for seaborne coal like the Strait of Hormuz for oil, as the former is available at scale from several countries (Indonesia, South Africa, Australia) that are not stuck behind a narrow and geopolitically volatile strait.

The other short-term lever some Asian countries can pull is nuclear power. Taiwan is looking to restart nuclear plants that it shut down last year, while several Southeast Asian countries had already made plans to build up their nuclear power resources. And earlier this week, Sri Lanka announced plans to rush forward a solar and batteries project and to look abroad for funding for a hydroelectricity project.

To the extent that any of these countries now experiencing energy hardship may be able to imitate the Chinese model, it will come at a substantial cost, not just in building up stockpiles that may go unused or infrastructure projects that are abandoned, but in closer links — and even dependency on outside sources for energy technology, cars, and critical minerals — on a rising regional hegemon instead of the vagaries of the world oil and gas market.

Countries may try to become more Chinese, but to China, they may just be customers.