The Iran War and the Impact of Expensive Oil on China’s Economy 5 10

The Iran War and the impact of expensive oil on China's economy, commentary.

The Iran War is disrupting the sanctioned oil supplies that underpin China's low-cost

manufacturing model, exposing deeper weaknesses in the country's slowing economy.

Udates, Israeli strikes on Carg Island, Iran's main oil export hub,

have disrupted the oil flows that support a significant portion of China's manufacturing cost

structure. The Iranian regime derives most of its revenue from oil exports,

and by 2025, it was selling approximately 80% to 90% of that oil to China.

China is the world's largest crude oil importer, bringing in roughly 11.6 million barrels per day

in 2025. Of those imports, analysts estimate approximately 2.6 million BPD consisted of

discounted or sanctioned crude, including 1.38 million BPD from Iran and 389,000 BPD from Venezuela,

roughly 17% of China's total imports. By 2025, sanctioned crude from Iran, Russia,

and Venezuela made up as much as 40% of all Chinese oil imports. Beijing officially denies

importing Iranian oil. China's general administration of customs lists five countries.

Russia, Saudi Arabia, Malaysia, Iraq, and Brazil as accounting for 62% of crude oil imports

in 2025, with Iran absent from the official record. Colombia University Center on Global Energy

Policy exposed the deception through tanker tracking. China imports more Malaysian crude,

1.3 million BPD in 2025, than Malaysia actually produces, which was only 535,000 BPD in 2024.

Beijing's manufacturing and export-led economy is supported by discounted oil.

Iranian crude has traded at around $8 to $11 per barrel below Brent,

and for Chinese independent refiners operating on thin margins. Replacing Iranian oil with

market-rate alternatives would translate into billions of dollars in additional annual costs.

Cheaper energy lowers production costs for the manufacturing sector, supporting competitiveness.

This price advantage has become more consequential as China's export sector faces mounting pressure.

Net exports accounted for one-third of economic growth in 2025.

The largest contribution since the late 1990s, but profit margins have collapsed.

The share of loss-making companies in manufacturing doubled from 15% in 2018 to 30% in 2025.

China's producer Price Index has declined continuously since October 2022,

remaining between minus 2 and minus 3% for 38 months, even as industrial output increased.

In November 2025, industrial profits fell by 13.1% year over year, wiping out nearly all

profit gains made earlier in the year. The economic pain from losing discounted barrels falls

first and hardest on China's independent refineries, known as teapot refineries.

These smaller-scale processors are clustered in Shandong province and built their operations

around cheap sanctioned crude. Shandong's independent refineries account for about 70% of China's

independent refining capacity and process roughly 1.3 million BPD of Iranian crude,

making these discounted supplies central to their operations. Teapot refineries account for about

20% of China's total crude imports and, unlike major state-owned refiners,

lack extensive strategic storage capacity and cannot easily absorb sudden feedstock disruptions.

The Venezuelan disruption demonstrated the pattern. In 2025, China imported 389,000 BPD of Venezuelan

crude, as Washington Titan controls on shipping and targeted shadow fleet tankers.

Shipments to China were projected to fall by as much as 75% by early 2026.

If Iranian flows are similarly curtailed, refinery run cuts and potential shutdowns are likely,

which would tighten fuel supplies in domestic markets and push gasoline and diesel prices higher.

Research published in Science Direct quantified the impact of an oil shortage on Chinese GDP.

When the shortage rate reaches 25%, domestic crude oil prices rise by 121.2%,

refined petroleum product prices rise by 67.8%, and GDP declines by 0.7%,

with losses accelerating as the shortage rate increases.

The American action forum assessed that the conflicts in the Gulf and the US

incursion into Venezuela in early 2026 have effectively cut off close to one-fifth of China's

oil supply. China has buffers. As of January 2026, China held an estimated 1.2 billion barrels of

onshore crude stockpiles, representing approximately 108 days of import cover. An additional 50 million

barrels of Iranian crude were stored or in transit offshore China and Malaysia as of early March 2026.

Those buffers by time, but do not resolve the underlying structural problem.

The more durable effect of sustained US pressure on Iran and Venezuela is the erosion of the

sanctions discount ecosystem, raising transaction costs, narrowing spreads, and increasing volatility

for marginal barrels. Market rate replacements from Brazil, Canada, Iraq, or the Gulf would compress

or eliminate the margins that make T-POT operations viable. For China, the loss of discounted barrels

is a compounding cost arriving at a moment when the economy faces slowing growth, weakening

manufacturer margins, and a sustained trade war with the United States.