China Controls Global Oil Demand and Prices Amid Middle East Tensions

For decades, global oil markets focused on OPEC and Persian Gulf producers to set prices. However, recent disruptions such as Iran’s blockade of the Strait of Hormuz and the weakening of OPEC’s influence have shifted price control toward demand, led by China, the world’s largest oil importer, which normally accounts for about 22% of global crude oil trade.

Despite early fears in February that the Hormuz crisis would push oil prices to unprecedented highs, with Nobel laureate economist Paul Krugman predicting $150 per barrel, prices peaked at $120 and have since fallen to around $90 even amid renewed conflict. This moderation is largely due to China’s significant reduction in oil imports, which dropped by 41% in June compared to the previous year, from a typical 45-55 million tons monthly to just 29 million tons.

Experts explain that China voluntarily curtailed imports by drawing on its strategic reserves and cutting refining activity, including limiting fuel exports and encouraging domestic consumers and government sectors to reduce fuel use. This demand suppression helped prevent a larger oil crisis. However, the reduction in refined fuel exports has contributed to a surge in global fuel prices, with refining margins in the Mediterranean region reaching historic highs, tripling or quadrupling since early 2023.

The rise in refining margins is partly due to Ukraine’s destruction of 40-50% of Russia’s refining capacity, which impacts global diesel supplies since Russia exports over 10% of the world’s diesel. This has created a global refining bottleneck, benefiting refineries with higher profits but leading to higher fuel prices worldwide, including in Israel.

Looking ahead, analysts warn that if China resumes importing oil at previous levels, prices could spike dramatically. However, experts agree China has no incentive to do so, as its economic growth depends on stable global demand and avoiding a global recession. China’s cautious approach effectively stabilizes the oil market for now, but if the Hormuz blockade persists beyond five months, China may reconsider its policy.

This evolving dynamic places China in a pivotal role controlling global oil prices, balancing its own economic interests with the broader impact on international markets.