China’s Strategic Position Strengthened by US-Israel Conflict with Iran

Oil and gas prices have surged following the recent military actions taken by the United States and Israel against Iran, disrupting energy markets and creating political challenges for the White House. Europe, still recovering from the energy shocks caused by Russia’s invasion of Ukraine, faces renewed pressure with natural gas prices reaching levels not seen since 2023. While China, as the world’s largest importer of oil and liquefied natural gas (LNG), initially appears vulnerable, a closer examination suggests the crisis may ultimately bolster its strategic position.

Immediate Market Impact

Within the first week of the conflict, oil prices rose by more than 25 percent, with the potential to exceed $100 per barrel if the Strait of Hormuz – a critical waterway for global oil transport, handling roughly one-fifth of the world’s oil supply – remains significantly restricted. U.S. Gasoline prices have climbed to their highest levels during President Donald Trump’s terms and are expected to continue rising. This disruption is largely driven by logistical concerns and market fear, rather than substantial physical damage to production facilities, though tankers are avoiding the strait, insurers are increasing rates, and producers, including Iraq, have begun curtailing output due to limited export options.

Natural gas markets have been particularly affected. Following an Iranian drone strike on Ras Laffan, Qatar’s major LNG export facility, operations were temporarily suspended. Qatar supplies approximately 20 percent of the world’s traded LNG, causing significant shockwaves in already tight markets.

China’s Vulnerability and Potential Benefits

China’s reliance on Middle Eastern energy supplies makes it seemingly susceptible to the crisis. Roughly half of its crude oil imports and a third of its LNG imports transit the Strait of Hormuz. Beijing has responded by calling for de-escalation and safe passage through the strait. However, over the long term, several factors suggest China may emerge as a beneficiary.

Energy Security Strategy

For over two decades, China has pursued an energy security strategy designed to mitigate the impact of geopolitical disruptions. A core component of this strategy is electrification – shifting its economy away from direct oil and gas consumption. Currently, over 30 percent of China’s final energy consumption comes from electricity, compared to a global average of just over 20 percent. More than half of the cars sold in China are electric, driven by policies focused on both energy security and emissions reduction. The International Energy Agency estimates that China has avoided 1.2 million barrels per day of oil demand growth since 2019 and projects Chinese oil demand will peak in 2027, two years earlier than previously anticipated.

Domestic Energy Production

China is also prioritizing domestic energy production. Coal and renewable sources dominate its power mix, with nearly all electricity demand growth in 2024 met by clean sources, primarily solar and wind. Half of all nuclear reactors currently under construction worldwide are located in China. While China imports natural gas, it utilizes only a modest share for power generation, allowing it to rely more heavily on domestic sources like coal during potential LNG disruptions.

Strategic Reserves

China maintains substantial strategic and commercial oil reserves, holding approximately 1.4 billion barrels, providing 120 days of import coverage. This contrasts with the U.S. Strategic Petroleum Reserve, which is roughly 40 percent smaller than it was a decade ago, having been reduced through sales to fund other government spending.

Shifting Global Energy Dynamics

The current crisis may also influence how other nations assess energy security trade-offs. As energy becomes increasingly weaponized, countries are seeking to reduce their exposure to volatile oil and gas markets through electrification. However, this introduces a new dependence on China, which dominates the supply chains for clean energy technologies, accounting for over 80 percent of global solar manufacturing, wind turbine production, and battery capacity, as well as processing the majority of critical minerals essential for these technologies.

Europe, while aiming to become an electrostate for climate and security reasons, has been hesitant to fully embrace dependence on Chinese clean-tech supply chains. The ongoing conflict may shift this calculation, as the reliability of traditional hydrocarbon suppliers appears increasingly uncertain. Concerns are also growing in Europe regarding the reliability of U.S. LNG exports, potentially subject to domestic political considerations.

Reinforcing China’s Geopolitical Role

By initiating military action without consulting its allies, the United States risks reinforcing the perception that it is a primary source of geopolitical instability. China, conversely, is positioning itself as a more stable commercial partner. This may lead to increased hedging among traditional U.S. Allies, as evidenced by Canada’s easing of restrictions on Chinese electric vehicles and European leaders’ visits to Beijing to strengthen clean energy cooperation.

China has strong incentives to cultivate these relationships, as clean energy industries account for over 11 percent of its GDP and more than a third of its economic growth. Sustaining this expansion requires continued foreign demand.

Conclusion

While the immediate shock of the conflict exposes China’s dependence on Middle Eastern oil and gas, it also highlights the success of its long-term strategy to enhance energy security through electrification, domestic production, strategic reserves, and dominance in clean technology supply chains. As confidence in global oil and gas trade routes erodes and electrification accelerates, this crisis may mark a turning point in the shift towards an electrostate era, positioning China with a significant and growing advantage in the evolving global energy landscape.