What War in Iran Means for China's Teapot Oil Refineries

In the wake of the war in Iran, oil prices have shot up for everyone. But not all oil is exactly equal. And, obviously, a lot of Iranian oil goes to China specifically. Furthermore, because Iran’s oil is sanctioned, a lot of it winds up at China’s so-called “teapot” refineries, which tend to be smaller and owned by independent companies. On the other hand, China has famously been building up its strategic petroleum stockpiles for years, and due to the rise of electric vehicles, they may have less economic sensitivity to the price of crude directly. On this episode, we speak with Erica Downs, senior research scholar at the Center on Global Energy Policy at the Columbia University School of International and Public Affairs. Erica has a long background studying Chinese energy policy and she talks to us about the potential cost that the war is imposing on China’s economy, why the country has built up such a big buffer stock in the first place, and how this global oil shock could ultimately play to its advantage. Subscribe to the Odd Lots NewsletterJoin the conversation: discord.gg/oddlotsSee omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Tracy Alloway?

  There are some market stories where you want every detail. Joe and I have made quite a few podcasts on that basis, but sometimes you've only got 10 minutes and just want to know what's moving markets fast. That's the Barclays Brief podcast. Every week, experts from Barclays Markets and Research get you up to speed on what's happening and what to watch next. Concise, focused, and brief. Search Barclays Brief wherever you get your podcasts.

• 0:26Speaker 01

  Running a business means keeping pace with the latest tech. You put a lot into building your enterprise software stack and scrapping it to integrate AI is out of the question. That's why IBM technology works with all the apps, data, and models you need. It's another way IBM helps you build on the technology you rely on. Let's create smarter business. IBM. Visit ibm.com to learn more.

• 0:57Speaker 02

  Bloomberg Audio Studios. Podcasts, radio, news.

• 1:13Joe Weisenthal?

  Hello and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

• 1:18Tracy Alloway?

  And I'm Tracy Alloway.

• 1:19Joe Weisenthal?

  So Tracy, we are recording this 1 PM, March 4th, 2026.

• 1:24Tracy Alloway?

  So one of those days where you have to nail the hour and the minute because who knows what's going to happen.

• 1:28Joe Weisenthal?

  Absolutely. Of course, we are in the midst of a war with the rent that started this past weekend. And it's been extraordinary week in markets, massive surge in the price of oil, all kinds of concerns about the sheer logistics of getting oil, as well as other commodities, out of that region. Who's going to be affected? The ramifications are just global for obvious reasons.

• 1:52Tracy Alloway?

  Yeah, there's clearly a lot to talk about, but there are some interesting angles in particular that you and I have been discussing. And we're going to try to hit all of those individually in a lot of different episodes that are coming up. But for this particular episode, we want to talk about something that, you know, obviously, the US, Europe have kind of been, I would say, the main subject of a lot of the hand wringing or the focus at the moment. So Europe, we know, has had to grapple with higher energy costs for a while. And clearly, you know, all this chaos in the Middle East is not going to be good for that. But one thing that hasn't gotten as much attention is what this actually means for China, which is a huge, huge purchaser of oil from the Middle East.

• 2:37Joe Weisenthal?

  Right. This is really important. So obviously, in the US, we're swimming with oil. We're an oil exporter. This could be very good also for our gas exports to Europe. I mean, already, we've seen this big increase in gas exports from the US to Europe, particularly just in the wake of the ongoing war in Ukraine. So this could create further opportunities. But for all the countries that are, you know, major importers, and China being one, is obviously a very different dimension for them.

• 3:04Tracy Alloway?

  Absolutely. Also, can I just say that this particular topic is finally, finally, an opportunity to touch on teapot refiners in China, which I always wanted to do an episode on. And for some reason, we never got to it. But but now's our chance.

• 3:18Joe Weisenthal?

  I will learn what a teapot refiner is.

• 3:21Tracy Alloway?

  Wait, what's your impression? If someone says teapot refinery, what do you think?

• 3:25Joe Weisenthal?

  Don't put me on the spotlight. I just imagine a little refinery.

• 3:27Tracy Alloway?

  Yeah, I mean, that's it, basically.

• 3:29Joe Weisenthal?

  All right. Well, that was a good guess. Yeah, I guess it's.

• 3:32Tracy Alloway?

  I just think it has a cute name, and so I like thinking about it.

• 3:35Joe Weisenthal?

  Anyway, I'm very excited to say we really do have the perfect guest today to sort of talk about the energy dimension from some angles that have that deserve and need more exploration in this precise moment. We're going to be speaking with Erica Downs. She's a senior research scholar at Columbia University's Center on Global Energy Policy and an expert, truly, in this field. Erica, thank you so much for coming on Odd Lots.

• 3:57Speaker 04

  Thank you so much for having me.

• 3:59Joe Weisenthal?

  Just for the sake of our audience, why don't you give us the sort of brief overview of your work? Tell us a little bit about what you do and your general field of study.

• 4:07Speaker 04

  So my research focus is primarily on the geopolitics of energy. And so I've been kept busy recently looking at China's energy relationships with Russia, with Venezuela, and of course, this week with Iran.

• 4:23Tracy Alloway?

  So why don't you sum up, I guess, China's relationship with energy at the moment then? The only thing I know in recent times that sort of hit the headlines is that China's been importing an enormous amount of oil, which both suggests that it needs oil and it's an important thing for its economy to work, but also that, you know, maybe in the face of tighter supply coming from the Middle East, it has something of a cushion.

• 4:49Speaker 04

  So yes, China has been putting a lot of oil into storage. They kickstarted their Strategic Petroleum Reserve over 20 years ago and have been building it up precisely to have in moments like the one that we are in now. Now China, as you mentioned, is a big importer of oil. About half the oil that China imports comes from the Middle East. Most of those Middle East oil supplies pass through the Strait of Hormuz, which is now closed.

• 5:21Joe Weisenthal?

  Talk to us a little bit about the volumes here that we're talking about. Tracy mentioned that obviously they're importing quite a bit and much of it keeping in storage. Like, okay, we're talking about Iran or something. How crucial is that relationship? What do we know about its volume? What do we know about pricing? Tell us some more details about this particular bilateral trading relationship.

• 5:44Speaker 04

  Sure. So last year, China imported 11.6 million barrels per day. About 1.4 million barrels per day came from Iran. So that accounted for about 12% of China's crude oil imports. Now, the main buyers of Iranian oil in China are the teapot refineries. I've been following the teapot refineries for a long time and I love to talk about them. So Joe is very happy to hear you speak about them in your introduction. Yeah, and so the teapots are small, independent refineries. Many of them are clustered in Shandong province.

• 6:28Speaker 04

  They're not as big or sophisticated as the refineries operated by China's national oil companies or the new integrated refining and petrochemical projects. These are world scale projects that have popped up in China over the past few years. So the teapots are much smaller, less sophisticated, and they rely on the discounts they can receive on sanctioned crudes to boost their bottom lines. And in some cases, they probably depend on these crudes for their survival. So they're the main buyers of Iranian crude in China. The national oil companies that were lifting all of Iranians crude to take back to China

• 7:11Speaker 04

  10, 15 years ago are completely out of the Iran oil trading business because of concerns about US sanctions. And just to bring this back to the teapots, the reason why they are buying and the national oil companies, China's national oil companies, aren't is because the teapots are more risk tolerant. And what I mean by that is that the national oil companies have a vested interest in maintaining access to the US dollar financial system. These are global companies with global operations. They don't want to lose that access. Whereas if you look at the teapots who are still buying Iranian crude today, I suspect that they have little or no interest

• 7:56Speaker 04

  in maintaining access to the US dollar financial system. Sure, they'd prefer not to be sanctioned, but being sanctioned wouldn't be catastrophic for them in the way it might be for Sinopac or China National Petroleum Corporation. And so it's this risk tolerance, as well as this pursuit of discounted barrels, that has made the teapots the biggest importers of Iranian crude in China.

• 8:22Tracy Alloway?

  So I don't mean to go on too big of a teapot tangent. How's that for alliteration joke? Thank you. But how did we end up with this situation where we have these national refining giants in China, which I assume enjoy support from the state and they enjoy all the benefits of scale? And then you have these tiny or smaller refiners, independent refiners, that have sort of cropped up. How did that system actually begin?

• 8:51Speaker 04

  Yeah, so sure, happy to provide some background. So the teapot refineries, which are actually called local refineries in China, originated, they grew up in China, in northeastern China, to process crude from the Shangli oil field, you know, which historically was one of China's backbone oil fields. And for most of their existence, you know, these teapots, you know, did not have the right to import and process imported crude. And this all changed back in 2015, when the Chinese government, you know, said that teapots who met certain requirements would be granted licenses to purchase and process imported crude.

• 9:36Speaker 04

  And the criteria that the teapots had to meet, you know, was for things such as, you know, sort of getting rid of highly polluting crude distillation units, building natural gas storage, believe it or not. And so, you know, teapots that met these requirements could, you know, apply for licenses and they'd get a license and they'd be given a quota and they could use that quota to purchase crude from outside of China's borders. And when I first started looking at the teapots, you know, around the time that they got the permission to import crude, they had a pretty diverse slate of suppliers. But as sanctions on, you know, countries such as Iran, Russia, you know,

• 10:21Speaker 04

  Venezuela tightened and discounts were on offer to entice buyers to take these barrels that a lot of other importers were consuming, the teapot stepped into the void.

• 10:33Joe Weisenthal?

  This is already fascinating. I've already learned a lot from this. Do we have a sense, like, how big are these discounts? So intuitively, okay, a country gets sanctioned and then a bunch of buyers, and that makes a lot of sense, don't want to deal with it or don't want to risk getting sanctioned themselves. So when Iran, by dint of sanctions, essentially forced to sell a significant amount of their oil to these teapots, do we have a sense of like what the pricing is on these deals relative to overall oil prices?

• 11:05Speaker 04

  So industry press will report, you know, the discounts available, which change over time. And the discounts are usually reported as, you know, X number of dollars lower than the price of Brent crude. Yeah. So the discounts that China's teapot refineries receive on sanctioned barrels are certainly attractive enough to make them seek them out. Now, these discounts change over time. You know, they're often reported in industry press as, you know, a certain number of dollars, you know, cheaper than the price of Brent crude. And just to give you a sense of how important these are to the teapots, Reuters ran a piece, I believe,

• 11:46Speaker 04

  back in 2023, where they said they had calculated that China had saved $10 billion on crude oil imports by importing these sanctioned crudes.

• 11:56Tracy Alloway?

  Okay, so you you can imagine that in the current scenario where you have these teapot refineries that are, you know, benefiting from the discount between sanctioned and non-sanctioned oil, they're going to be hit by, I guess, less oil.

• 12:11Speaker 04

  Yeah.

• 12:12Tracy Alloway?

  In the system in general. But, I mean, Russia still exists. Russian oil is still out there. Could you see a scenario where they just start importing more Russian oil to offset some of the supply that's lost in the Middle East?

• 12:24Speaker 04

  Yeah, I do think that is likely. And I will say, this is actually a tough time for the teapots, because last month, the Trump's removal of Venezuelan President Maduro from office and the US taking control of the marketing of some of Venezuela's crude, sort of raised questions about how much oil, how much Venezuelan oil would China still be able to import and at what price. And in anticipation of a potential shortfall in their Venezuelan oil imports, the teapots turned to Iran and specifically to purchasing Iranian heavy crude, which is, you know, a decent substitute and, you know, certainly

• 13:07Speaker 04

  could be obtained at a discount. But now, of course, you know, with the war in the Middle East, this is raising questions about the teapot supply of Iranian oil. The good news, I guess, for China as a whole is that they are sitting on substantial strategic and commercial oil stockpiles that

• 13:26Speaker 04

  Provide 120 days of China's net crude oil imports at the 2025 level. So what that means is that if China was unable to import any oil at all, which obviously isn't going to happen, they could rely on their stockpiles for four months of crude oil imports. And so if you look at Iranian crude and perhaps other flows that might be disrupted by the closure of the street before most, they're sitting in a pretty good position. Also, there is a good amount of Iranian and Russian crude in floating storage in Asia, off the coast of China and Malaysia.

• 14:07Speaker 04

  And this had been building up before the US and Israel launched their strikes on Iran. And there is also Iranian oil sitting in bonded storage in Chinese ports, which could be tapped into.

• 14:38Tracy Alloway?

  There are some market stories where you want every detail. Joe and I have made quite a few podcasts on that basis. But sometimes you've only got 10 minutes and just want to know what's moving markets fast. That's the Barclays Brief podcast. Every week, experts from Barclays Markets and Research get you up to speed on what's happening and what to watch next. Concise, focused, and brief. Search Barclays Brief wherever you get your podcasts.

• 15:04Speaker 01

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• 15:34Joe Weisenthal?

  You know, you mentioned the significance of the, you know, we're talking about the Iran-China trading relationship. How significant was Venezuela in this picture? And what do we know about the picture now? Because I think there's still Venezuelan oil now going to China right now. But how, talk to us about the significance of that piece of the puzzle.

• 15:54Speaker 04

  Yeah, so Venezuela is a smaller crude oil supplier to China than Iran. Last year Venezuela, you know, supplied, you know, around 400,000 barrels per day of crude oil to China. So you're just looking at, you know, a few very, very small share, you know, 3%, 4% of China's total crude oil imports last year. However, you know, virtually all of that oil was going to the teapot refineries. So while you can say, oh, China is not going to be hit too hard if, you know, it loses 400,000 barrels per day of crude oil imports from Venezuela, it does sort of make life more difficult for the teapot refineries.

• 16:37Speaker 04

  Now, Secretary Wright did say a couple of weeks ago that, you know, the US had sold some Venezuelan crude to China. I don't know who the buyers are. And of course, for the teapots, you know, price is also an issue. I mean, yes, they would like to, you know, continue to import those Venezuelan barrels because they're used to processing, you know, that type of crude. But it, the current situation means that they might be, even if they can still, you know, buy a fair amount of Venezuelan oil, you know, that's being marketed by the US, you know, I think a big question for them is at what price?

• 17:12Joe Weisenthal?

  Yeah.

• 17:13Tracy Alloway?

  Can we go back to China's Strategic Petroleum Reserve for a second? Because I feel like the US Reserve was such a big talking point during the Biden administration, and it kind of, you know, soared into our collective consciousness. When we think about China's SPR, what are the actual goals there of the Chinese state? Why did they establish this? What are they thinking about? And then also, what do we actually know about it?

• 17:39Speaker 04

  Yeah, so the main reason China established its strategic oil reserve is because China is a major importer of oil. China switched to a net importer of oil in 1993, and as its reliance on imported crude grew, there were real concerns about supply security in China. And so, building a strategic petroleum reserve, you know, is one of the things that they did, you know, to make sure that they were in a good position, you know, to deal with unexpected disruptions

• 18:21Speaker 04

  to their oil supplies. Now, one thing, as I mentioned earlier, I've been looking at this issue for quite some time, and I recall, you know, going back, you know, over 20 years ago, you know, there were discussions in China about, do we need this? Can we afford it? You know, how big a stockpile, you know, do we want to invest in building? And, you know, as you may know, for states that are members of the International Energy Agency, which China is not, but the International Energy Agency, you know, requires members to hold, you know, stockpiles, you know, equal to, you know, 90 days of net oil import coverage, you know, and so that's the benchmark that has been used in a lot of Chinese discussions about its SPR

• 19:03Speaker 04

  over the years. And, you know, again, I remember, you know, going back 15, 20 years ago, and you did have voices in China that were saying, we already import a lot of oil, our imports are going to continue to grow. Can we really afford to build 90 days of net oil import coverage? But if you fast forward to today, and you look at the different estimates out there about how much oil is sitting in storage in China, you know, to include both strategic stockpiles, as well as commercial stockpiles held by oil companies, China holds more than 90 days of net oil import coverage. And so, looking at the disruptions, looking at the geopolitical

• 19:43Speaker 04

  sort of upheavals in crude oil markets, you know, just this calendar year, with the US actions in Venezuela, and now Iran, the fact that China is sitting on these substantial stockpiles, you know, has to be a source of peace of mind and sort of a vindication for undertaking this project.

• 20:04Joe Weisenthal?

  Tracy mentioned, obviously, all the fights about the SPR in the US under the Biden administration. And it's kind of weird because like, you know, there's some question, why does, you know, the US is a massive exporter, producer of oil now in a way that wasn't the case 20 years ago or 30 years ago, or at the time, certainly at the time that the SPR was first conceived. So I'm, it's a little unclear what the point of an SPR is. And so I'm not surprised that it's sort of used to lower the price of gasoline for consumers in a time of high inflation and so forth. In China, where, you know, the automobile, you know, they're switching rapidly to EVs. Oil is not going to be as important for that and

• 20:43Joe Weisenthal?

  it's going to continue to be less important over time. How much is it about prosecuting a war at some point and the prospect that they would completely get shut off from oil imports in the event of aggression? And how much is that really what it's about having the resources to fight a war if and if and when that time comes?

• 21:05Speaker 04

  Yeah, no, I absolutely think that is part of it. Ever since China's switched to being a net importer of oil, there have been real concerns about the vulnerability of its oil imports and specifically its seaborne oil imports by various modern navies, notably that of the United States. You know, that's why we saw China build these pipelines to deliver oil overlands from Russia and from Kazakhstan. And so, given those concerns, given, you know, those fears that in the event of a conflict that hits China, you know, and the United States, you know, against each other, would China, you know, would

• 21:45Speaker 04

  the United States be able to cut off the flow of oil to China? And just to put this even in sort of broader historical context, you know, if we go back to the 1960s, the time that the relationship between China and the Soviet Union was following, was falling apart. At that point, China was heavily reliant on the Soviet Union for refined products needed. To fuel its military jet fuel. And so as those tensions between China and the Soviet Union increased, the USSR did cut back on refined oil product exports to China. You know, so certainly, you know, there are examples, you know,

• 22:31Speaker 04

  looking sort of further back in time, there basically, you know, the reason I'm sharing this bit of history with you is to let you know that China has firsthand experience of being in, you know, a tense relationship with another major power. And having that major power, uh, you know, squeezed the country with respect to imported oil products.

• 22:54Tracy Alloway?

  Actually, this might be a good time to ask just about China's foreign policy more broadly. So I saw, you know, they issued a statement following the attacks. And I read one person describe it as the kind of thing you would expect from Brussels. You know, very

• 23:09Joe Weisenthal?

  Yeah, yeah.

• 23:10Tracy Alloway?

  Very generic, expressing concern over the situation in Iran. But they also expressed concern over the attacks on the UAE, for instance, which is of economic importance to China, certainly. What's your sense of, I guess, what is at stake beyond just oil for China in this particular situation?

• 23:32Speaker 04

  You know, sort of looking beyond China's energy imports from the region. China's national oil companies are big producers in Iraq. So they have a number of upstream assets in that country. Chinese firms are also involved in building other types of infrastructure in the region. For example, there are Chinese companies that are building, operating renewable energy facilities, especially solar farms in the region. And because of this, we've seen, you know, Beijing call not just, you know,

• 24:12Speaker 04

  for everyone to help ensure the free flow of energy from the region, but also to make sure that civilians aren't hit, right? Because you have Chinese citizens on the ground there. It doesn't want any of its physical economic assets, infrastructure in the region to get hit. So that's the, you know, the people and asset side of the story.

• 24:33Tracy Alloway?

  Joe, I just remembered in Dubai, kind of outside of like, Maine Dubai, there was this mall and it was called, I think it was called Dragon Mart and it was just a Chinese market in Dubai. You would love it, absolutely. You like, everything imaginable was available there. And like, when you went there, it felt very, very surreal, actually.

• 24:54Joe Weisenthal?

  Yeah, I would love it. That might, I, that sounds like the most interesting thing I've heard of in Dubai. Nothing else, I've never, nothing else about Dubai has ever, uh, made me.

• 25:02Tracy Alloway?

  I can tell you more interesting things. There's the North Korean restaurants and things like that.

• 25:06Joe Weisenthal?

  Oh, I've, I want to check out North Korean restaurants.

• 25:10Tracy Alloway?

  Maybe you do and maybe you don't.

• 25:11Speaker 04

  I've been to one in Beijing.

• 25:13Joe Weisenthal?

  Oh, really?

• 25:14Speaker 04

  Many years ago.

• 25:14Joe Weisenthal?

  Yeah, I've read about them. I've read about like the chain of North Korean, I'm very, I mean, it's just Korean food, right?

• 25:21Tracy Alloway?

  I mean, well, it's slightly, it has its own twist. It's good food, not so great surveillance. That's how I'll, I'll, or actually, maybe the surveillance is a little too good.

• 25:30Joe Weisenthal?

  Yeah.

• 25:30Tracy Alloway?

  Yeah, there we go.

• 25:31Joe Weisenthal?

  Good food, excellent, that's like, that's a great, like, a great Yelp review. The surveillance was great. The food.

• 25:38Tracy Alloway?

  Good food, excellent surveillance.

• 25:40Joe Weisenthal?

  Surveillance.

• 25:40Speaker 04

  Come for the food, stay for the surveillance.

• 25:42Joe Weisenthal?

  Stay for the face recognition. You know, I get the impression with, just to stick on Chinese foreign policy for a second. One thing I hadn't realized up until recently, it just hadn't dawned on me is like, China doesn't have any like formal like treaty allies. You know, there's like nobody unlike the US, like, we have an agreement, we then, you know, we're obligated or we agree to defend them. I don't think China does it that way. Like, I was surprised, you know, at the kind of, Tracy mentioned that the sort of neutralish tone, it's like telling Iran, like, be careful in your retaliation and who you hit for obvious, some of the reasons that you mentioned. You know, but it's certainly not like we're seeing China make any statement like, we're gonna,

• 26:26Joe Weisenthal?

  oh, we're gonna up our shipments of weapons or defense weapons to Iran. Maybe they're doing some of that covertly, but they don't make a big announcement of it. But it strikes me like that's very telling that even a country with whom they have a fairly substantial economic partnership with and maybe some sort of ideological alignment in terms of countering Western hegemony and so forth. You know, still, even with them, there's nothing formally established. Talk a little bit more about how they think strategically about the region beyond just the sort of commercial needs.

• 26:59Speaker 04

  Sure, so China wants to maintain good relations with Iran, and it also wants to maintain good relations with Saudi Arabia, UAE, Oman, other states in the region. And so China historically has, you know, sort of walked this tightrope, you know, in trying to balance relationships, you know, with the Saudis, with the Iranians. And I think they have been pretty successful in pulling that off. Now, China has no interest in getting bogged down in a military conflict in the region, so we're not going to see China get involved in that.

• 27:41Speaker 04

  They are happy to be a mediator. And in fact, Beijing, you know, recently announced, I think just a few hours ago, that they are sending their special envoy to the region for mediation purposes. And so I think that China likes playing that role. I think it certainly bolsters their image as a sort of responsible outside power that is, you know, getting involved in the region, you know, with the goal of restoring peace and stability.

• 28:36Speaker 01

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• 29:05Tracy Alloway?

  So one thing I wanted to make sure to ask you is, just more broadly, you've spent your entire academic career studying Chinese energy markets and Chinese energy policy. What's the one thing you think people should know about that particular market? Or the one thing that makes China unusual in the grand scheme of global energy policies?

• 29:26Speaker 04

  So one thing I'd like to highlight is China's changing role in the global energy system. So for most of the time that I've been following China's energy sector, you know, it's in looking at China's role in global energy markets, it's been China as a growing importer of oil and natural gas, both pipeline gas and LNG, as an opportunistic coal importer. But there's an important change underway in China, you know, which is that the country is transitioning to a lower carbon future.

• 30:07Speaker 04

  You may have seen a lot of news reports about record level of, you know, wind and solar capacity installations in China. Part of this is certainly about decarbonization. It's also about energy supply security. You know, I think one thing China has taken away from the war in Ukraine, from, you know, US activities in Venezuela, you know, the current war in Iran, is that, you know, it's better just to be able to rely on energy sources within your own borders. There's an energy supply story as well. There's an energy security story for China. But

• 30:48Speaker 04

  the other thing that's going on here is that China wants to continue to be the supplier of the green technologies that the rest of the world needs for decarbonization, energy security, you know, access to reliable and affordable energy. So those three sets of goals. And so we are seeing China emerge as this

• 31:13Speaker 04

  Green tech superpower, if you will. And so it's very interesting to think about this and China playing this role, you know, at the same time that the United States is advancing this agenda of energy dominance, which of course is focused on, you know, exporting more US LNG and oil and sort of using those as a source of leverage. When I think about that, my instinctive reaction is, you know, maybe more, of course, it could be a carrot or a stick, you know, but I think of it as being more of a stick. Whereas I think that, you know, China has, you know, something very different that it can offer

• 31:56Speaker 04

  that might be quite appealing to a lot of countries in the world. There's a lot of countries don't want to spend a lot of their foreign exchange on energy imports. They don't want to be vulnerable to supply disruptions. And so if China's coming along and saying that, okay, you have, you know, great solar energy resources and you can buy solar panels for us, or you can hire, you know, a Chinese EPC contractor to build you, you know, a solar farm, then, you know, countries don't have to spend as much energy on foreign exchange. And just as one example, did a lot of work a number of years ago, like circa 2018, 2019, looking at why China was building so many coal-fired power plants in Pakistan

• 32:41Speaker 04

  when the country had, you know, tremendous, you know, renewable energy resource, you know, wind and solar resources, especially, especially solar. And I ended up doing this deep dive into Pakistan's energy sector. You know, one of the things I discovered is that they were spending a lot of, you know, very precious foreign exchange on, you know, importing fuel oil, you know, and now coal to run these power plants, and that was an issue. And now we are seeing, there've been a lot of reports over the past year about how you have individual households and businesses in Pakistan that have been buying a lot of Chinese solar panels to put on their roofs so that they have affordable and reliable energy.

• 33:23Speaker 04

  And so I just, whenever I, you know, hear about the Pakistan example, I keep thinking back to that earlier research that I did. And how, you know, this to a certain extent has to be, you know, helping Pakistan conserve foreign exchange or conserve foreign exchange that it previously. It would have spent on energy imports. I don't know the size of the savings off the top of my head, but that's just, you know, one example I wanted to highlight.

• 33:47Joe Weisenthal?

  Yeah, it does seem like, you know, for most of recent history and still today, like fossil fuel dominance is incredibly important. And it's not like, that's not going to change overnight. And so, yes, you have incredible fossil fuel capacity reserves in the U.S. Latin America, the Middle East and so forth. But the longer term trend, as you spell it out, seems to be like at some point. That much of the world just doesn't need as much of it and their ability to reduce their energy bill will come from Chinese technology. Whether we're talking about wind, solar or batteries that has been installed domestically and potentially reducing their bill.

• 34:31Joe Weisenthal?

  And so the payments that were at one point going to the U.S. or going to the UAE, et cetera. Switches to being payments for renewable technology from China.

• 34:42Speaker 04

  Yes.

• 34:43Joe Weisenthal?

  Great. I, I, I summed up the.

• 34:47Speaker 04

  I mean, I could also, I mean, the other sort of thing here is that, I mean, I think that, and if we sort of, you know, looking again at China. China's demand for diesel and gasoline has already peaked. In the case of diesel, a lot of it has to do with the property collapse. You know, with gasoline, it's been the rapid uptake of EVs. And as a result of this very rapid uptake of EVs, the International Energy Agency, some of China's national oil companies, you know, have moved forward. Their date for when China's, you know, overall oil demand is going to peak.

• 35:24Speaker 04

  Before I was seeing them, you know, years dates closer to 2030, now 2027, at one point, Sinopac, one of the national oil companies had. Even said, you know, twenty twenty five. And so, as I mentioned, we have seen, you know, demand for road transport fuel peak, but China will still need oil for petrochemicals, which in turn are used in some of these green technologies, right? Like, we need petrochemicals, feedstocks as inputs for EVs, for solar panels, for lithium ion batteries. So there is a link there, and we will see, you know, China still needs to import some oil to continue to be a leader in manufacturing these technologies.

• 36:09Tracy Alloway?

  So I know you're not a macroeconomist, obviously, but when you look at what's happening now in Iran and the situation in the Middle East, what's your best guess for how this actually feeds into Chinese inflation and the broader, I guess, energy prices? Like, how much could we actually see domestic energy prices in China go up as a result of curtailed supply? And how much of that curtailed supply can just be offset from the reserve?

• 36:41Speaker 04

  Yeah, so we are seeing higher prices for energy. I know we've been talking a lot about oil, but I'd actually like to turn to LNG to answer this question. So China imports almost one third of its LNG from the Middle East. Almost all of that comes from Qatar with a little bit from the UAE and Oman. Oman obviously lies outside the Strait of Hormuz. But if you look at the supplies coming, you know, first and foremost from Qatar and that little bit from, you know, from the UAE, those supplies are no longer flowing to China. And China doesn't have a massive

• 37:23Speaker 04

  strategic gas reserve, you know, the way it does with oil. And so the longer supply of LNG from, you know, from Qatar to China is disrupted, you know, the more China is going to be under pressure to cobble together a response. And I think in the very short term, one of the big things, you know, That they can do is find ways to use less gas. And here, sky high prices for spot cargoes is going to help China do that. You know, and there have, there has been reporting in industry press where unnamed traders, you know, certainly at the big state owned companies have been saying that, you know, we're not going to buy anything on the spot market right now because prices are just too high.

• 38:08Joe Weisenthal?

  Do they frack in China? Have they got into the fracking revolution yet? Is that a thing over there?

• 38:14Speaker 04

  Yeah, they have. And actually, last year, forty three percent of China's natural gas production came from unconventional sources. And this statistic is really of interest to me because I remember, you know, back when the US shale revolution was taking off, people would often note that on paper, China's shale resources were either, you know, were bigger than or, you know, almost as big as the United States. Like basically, I mean, this is going back like fifteen, sixteen years, but basically, there were big, China had big shale resources on paper. So I would often get the question, you know, are we going to see a shale revolution in China?

• 38:57Speaker 04

  My answer was, it's going to be more of a shale evolution because of different factors in the United States and China. Like in the United States, for example, people who were sitting above, you know, promising shale resources could be compensated for that. Not so much in China, you know, in the United States, you know, the shale revolution was really launched by these, you know, small nimble companies to maximize profit. Whereas in China, if you look at all the, you know, upstream oil and gas assets, they're concentrated in the hands of China's national oil companies, which are state owned, maybe not as nimble and certainly have, you know. And so, you know, there are a number of different factors.

• 39:42Speaker 04

  Those are just, you know, two that I can.

• 39:44Tracy Alloway?

  Wait, I'm actually, I'm really interested in this because if you think about China's large infrastructure projects and its renewable build out, it feels like they basically are able to flip a switch and say like, we want to go big on this. And then they go big on this relatively quickly and probably faster than it usually happens in places like the States. But you're saying for this one thing, for fracking, that wasn't the case, which is very surprising to me.

• 40:11Speaker 04

  Yeah, it's been a much more gradual buildup of unconventional gas production in China. And of course, you know, when I say 43% of gas production, you know, it's from unconventional sources, you know, that's also including things like, like tight gas. It's not all shale, although shale was absolutely a part of the story. Yeah. And so to your point, yes, this was a much more gradual buildup in unconventional gas production.

• 40:37Joe Weisenthal?

  Erica Downs, fascinating conversation. I learned a lot in that 45 minutes. Really appreciate you coming on Odd Lots and yeah, thanks for joining us.

• 40:46Speaker 04

  Thanks so much for having me.

• 40:59Joe Weisenthal?

  Tracy, that was a really interesting conversation. I didn't know that about the, I mean, I guess I'm not surprised that there were small refineries, but that they serve this very strategic purpose of not having those international, I guess, liabilities, right?

• 41:12Tracy Alloway?

  It's like a parallel like system that they've built outside of, I guess, the more regulated official energy industry. It's fascinating to me, A, it's a good exercise in branding because I just find the teapot name so compelling, but also it's like an entire arbitrage industry, right?

• 41:32Joe Weisenthal?

  Yeah, yeah. No, it makes sense, right? Like, there's always going to be someone sanctioned, right? That's, that seems like safe, there's always, especially-

• 41:39Tracy Alloway?

  Three certainties in life, death, taxes, and someone, somewhere is going to have their oil sanctioned.

• 41:44Joe Weisenthal?

  That's absolutely true. And so, yeah, but they're going to sell it and they're going to sell it at a discount. And obviously, any buyer of sanctioned commodities is going to be taking on some sort of risk that they're going to get slapped with like a secondary sanction or penalty and so forth. So it makes sense to have a sort of a, you know, decentralized cottage industry. Cottage industry, it's another cute sounding thing, it's not really cute.

• 42:09Tracy Alloway?

  It's all very cute.

• 42:10Joe Weisenthal?

  It's all very cute. But another, this whole, yeah, this separate industry that does not have the same, they're not exposed in the same way.

• 42:16Tracy Alloway?

  Yeah. And the other thing I was very interested to hear, obviously, the discussion around the strategic petroleum reserve was very interesting, this idea that, you know-

• 42:26Tracy Alloway?

  There might be foreign policy considerations behind building up that strategic supply. Also, the idea that shale hasn't taken off as fast in China, like, again, that really surprises me.

• 42:36Joe Weisenthal?

  Yeah, it surprises me, too.

• 42:37Tracy Alloway?

  We're so used to hearing that one of the benefits of a command economy is that you can more or less, you know, direct this big stuff, and it doesn't seem to have happened in the case of shale. And again, maybe that's more of a strategic decision.

• 42:49Joe Weisenthal?

  I was gonna say, I mean, what I would surmise, and it's just speculation, is like, no, like, the big priority is the renewables, right?

• 42:55Tracy Alloway?

  Renewables, yeah.

• 42:56Joe Weisenthal?

  The big priority is batteries, solar, wind, and so forth. And I do think this is like, gonna be the big, I don't know how long it'll take place, but the big shift that's already happening, I guess, underway, is this, like, a bunch of other countries that aren't the US and aren't China are going to want to reduce their energy import bill.

• 43:16Tracy Alloway?

  Yeah.

• 43:17Joe Weisenthal?

  And they're gonna swap it for an energy technology bill that they license from China, and that is a long-term, um...

• 43:24Tracy Alloway?

  I think that's a really important point.

• 43:25Joe Weisenthal?

  It's a really important trend, and events like the war are, in the short term, going to raise China's import bill and others, and in the long term or the medium term, encourage more countries to accelerate that transition. So that's a pretty big story.

• 43:40Tracy Alloway?

  Pros and cons.

• 43:41Joe Weisenthal?

  Yes.

• 43:41Tracy Alloway?

  If there's anyone out there who's working in Chinese shale or fracking, or has attempted to work in Chinese shale or fracking, I'd be very interested in talking to them, so.

• 43:50Joe Weisenthal?

  I want to watch The Landman of China.

• 43:53Tracy Alloway?

  I haven't watched The Landman, America version, but I bet that would be interesting.

• 43:58Joe Weisenthal?

  You gotta watch it.

• 43:59Tracy Alloway?

  All right. Shall we leave it there?

• 44:00Joe Weisenthal?

  Let's leave it there.

• 44:01Tracy Alloway?

  This has been another episode of the Odd Lots Podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

• 44:06Joe Weisenthal?

  And I'm Joe Weisenthal. You can follow me at TheStalwart. Follow our guest, Erica Downs. She's at Erica Downs. Follow our producers, Carmen Rodriguez at Carmen Armin, Dashal Bennett at Dashbot, and Kell Brooks at KellBrooks. And for more Odd Lots content, go to Bloomberg.com/oddlots, or the daily newsletter and all of our episodes. And you can chat about all of these topics 24/7 in our Discord, discord.gg/oddlots.

• 44:29Tracy Alloway?

  And if you enjoy Odd Lots, if you like it when we talk about teapot refineries and shale in China, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

• 45:21Tracy Alloway?

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