How China Saved the World From Trump’s Energy Crisis

When Iran closed the Strait of Hormuz earlier this year, experts projected oil prices would go to $200 a barrel. But then… they didn’t. In fact, while gasoline prices rose in the United States, and Europe and Asia suffered higher costs, the resulting energy crisis wasn’t even as bad as what followed Russia’s 2022 invasion of Ukraine.

Why? China. The country seems to have absorbed the costs of Trump’s war of choice by releasing hundreds of millions of barrels from its strategic stockpile. On this episode of Shift Key, Rob is joined by Rory Johnston, an oil markets researcher and the author of the Commodity Context newsletter. They discuss China’s massive (and quiet) intervention, why it’s “the most important thing we learned” from the Iran War, and what it means for the future of energy and geopolitics.

Shift Key is hosted by Robinson Meyer, the founding executive editor of Heatmap News.

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Here is an excerpt from their conversation:

Rory Johnston: So when we talk about visible crude stocks, what we’re talking about is the stockpiles of oil that are held in above ground storage tanks with floating roofs. And the floating roofs are important because we can use satellite imagery to infer how full those tanks are, whether optically via the size of the shadow — the lower they are, the bigger the shadow cast across the top of the tank, which is very cool stuff. And even more cool recently, you have SAR satellites that can measure very specifically the difference in the radar pinging off the top of the roof and the radar pinging off the top of, basically, the catwalk that goes around the top of the roof. So you can measure the distance between that.

So of a total Chinese crude storage that we know of — say 1.1 billion barrels, give or take — those held in strategic underground stocks that we know of — very important here — are roughly 131 million barrels across six underground sites. Now, by definition, we cannot see these underground sites. They do not have floating roofs. The implication here is that if we know that supply is coming from somewhere else in the system, but we’re not drawing — or by we, I mean, China here — is not drawing down visible commercial crude stocks, the kind of Occam’s Razor is that they’re drawing down stocks we can’t see. These are the underground stocks.

But the draws don’t end there. I mentioned China also doesn’t have official demand data. So what we are left with is deriving apparent demand data for China, which is essentially a domestic disappearance calculation. They do report, for instance, refining production. They report refining runs. They report refining production of, say, gasoline, diesel, jet fuel, etc. And you can net those refinery outputs with trade to get, basically, how much there should be in the economy that’s disappearing — net it, of course, for those inventories we can’t see.

Now, those run rates and those outputs, the biggest factor by far in the calculation of these apparent demand, those are down 3 million to 3.5 million barrels a day. That implies a demand-destructive event in China at the scale of what we saw at the beginning of 2020 during COVID Zero. That’s the scale of what we’re seeing. It would be equivalent to the largest contraction in Chinese history, at least modern history that we’re aware of. But strangely, obviously we knew about COVID Zero. There were endless stories about COVID Zero at the time. We knew that they were literally spraying bleach on the roads and no one was going anywhere. And there were robots that tracked you and kept you in your house. This isn’t happening now. So the assumption is that it’s just price alone that’s driving this kind of demand destruction.

But here again is where it gets weird, because Chinese domestic policy and regulations for fuel prices have capped or basically throttled the rate at which domestic petrol prices can rise. So while global gasoline diesel prices effectively doubled through this crisis. Prices of petrol in Beijing are only up by, at their peak, 30%. So it would be very strange to get a COVID Zero demand destructive event driven by only a 30% increase in prices. It doesn’t make sense.

You can find a full transcript of the episode here.

Mentioned:

China Oil Demand Doubts, Rory’s 2023 article about Chinese strategic stockbuilding

Previously on Shift Key: Why the Iran Ceasefire Hasn’t Ended the Energy Crisis, featuring Rory

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