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Erica Downs and Michal Meidan on China's Oil Shock That Wasn't · Columbia Energy Exchange

• 0:00
  Michal Meidan:
• 0:01
  This year, both Sinopec and CNPC, the two largest oil companies in China, are saying that oil demand more broadly has peaked. And so to a certain degree, and the Chinese thinking, oil is yesterday's story.
• 0:02
  Erica Downs:
• 0:03
  What analysts in China have been saying about this crisis and about China's energy security is the view that the source of global energy security is shifting away from control of resources like oil to control of technology.
• 0:04
  Bill Loveless:
• 0:05
  In the weeks and months after the start of the US-Israeli war in Iran, as oil tankers stopped transiting the Strait of Hormuz, analysts expected China to scramble to replace lost imports. Instead, available data shows that the world's largest oil importer actually cut imports. By June, China's reliance on foreign oil hit the lowest level since October 2016. The energy giant didn't even touch its oil reserves until May or June, and even then at modest levels.
• 0:06
  But the bigger surprise perhaps is that we've not seen the disruptions to China's economy that some expected. There's been no fuel rationing, no working from home mandate, and the oil shock hasn't appeared to impact the country's electric power system. So why hasn't the Chinese economy been harder hit? How much of this outcome is owed to the country's careful planning? How much to its diverse energy sourcing or demand reduction?
• 0:07
  And what does all of this say about the ways that energy security is shifting, and perhaps being redefined, in China?
• 0:08
  This is Columbia Energy Exchange, a weekly podcast from the Center on Global Energy Policy at Columbia University. I'm Bill Loveless. Today on the show, Erica Downs and Michal Meidan. Erica Downs is a senior research scholar at CGEP where she focuses on Chinese energy markets and geopolitics. Earlier in her career, she worked as a senior research scientist in the China studies program at the CNA Corporation, a senior analyst in the Asia practice at the Eurasia Group and an energy analyst at the US Central Intelligence Agency. Michal Meidan leads China energy research at the Oxford Institute for Energy Studies. Previously, she headed cross commodity China research at energy aspects and led China Matters, an independent research consultancy.
• 0:09
  We discussed a recent post that they wrote for the Center on Global Energy Policy where they examined how China is managing lower oil imports and what it reveals about the tools Beijing has built over decades to manage a supply shock of this magnitude.
• 0:10
  We considered the role of China's strategic petroleum reserves, its state-controlled fuel pricing, and the small independent teapot refiners. And most importantly, we talked about what the oil shock has revealed about China's energy system. Here's our conversation. Erica Downs, Michal Meidan, welcome to Columbia Energy Exchange.
• 0:11
  Erica Downs (03:21):
• 0:12
  Thanks for having us.
• 0:13
  Michal Meidan (03:23):
• 0:14
  Thank you. It's great to be here.
• 0:15
  Bill Loveless (03:24):
• 0:16
  And in your case, Erica, welcome back, my colleague. You've been on the program a number of times. Glad to have you back here again. We continue to watch the turmoil over the war in Iran, the implications for oil markets from the disruptions in the Strait of Hormuz and elsewhere, and we're constantly trying to figure out what is going on. We watched the price of oil from day to day and the impacts it has on markets around the world. It's a confusing situation for so many of us. And here we have China, which is the world's largest oil importer. As I say, the strait has been severely disrupted by this war, but we come back to China. Erika, how has China responded to the situation?
• 0:17
  Erica Downs (04:18):
• 0:18
  So China has been very calm and confident in their ability to manage the supply disruption. And one of the main things they did was to reduce their crude oil imports. In the blog post that Mihal and I recently put out, we note that China was able to reduce its crude oil imports in the second quarter of 2026 by about 30% or 3.5 million barrels per day. Even though the war started on February 28th, we use April as the start date for our analysis because of the sailing times between the Persian Gulf and China. So any oil from suppliers that use the Strait of Hormuz that had transited the Strait of Hormuz by before February 28th would have been arriving in China throughout March. So that explains the April start date. And very high level in terms of trying to figure out exactly how China brought about this decrease in its crude oil imports.
• 0:19
  (05:35):
• 0:20
  Our analysis shows that it was roughly divided between tapping into oil inventories and reduced refining runs, and we can get into the different factors that account for those reduced refining runs.
• 0:21
  Bill Loveless (05:50):
• 0:22
  Michal, was there anything that surprised you when you first looked at this data?
• 0:23
  Michal Meidan (05:55):
• 0:24
  I think the extent of the cut in crude imports was surprising to everyone in the market as well. Just that ability to slash, if you look from February levels to April or May, it's close to five million barrels a day that declined. And then the ability to sustain that in the initial months without resorting to stock draws. Now, so part of this is the difference between last year when they were stockpiling large amounts and this year they just didn't stockpile to begin with. So that already, that's what Erica was just alluding to. The first bit was just not adding to their reserves. But the fact that for the first couple of months of the war, they were able to reduce those imports but not tap into existing reserves. And only in May or June did they start drawing down, and even then very modest volumes.
• 0:25
  (06:52):
• 0:26
  So if you think about it, and we'll talk about the data in a minute, it's very hard to get accurate data, but various calculations allow you to look at it. And I think the highest estimate that we could come up with, and I'm being very generous here, is that they may be tapped into a hundred million barrels out of reserves that are estimated at anywhere from 1.1 to 1.4 billion barrels. So a drop in the ocean. And that sort of, I guess the austerity was quite surprising.
• 0:27
  Bill Loveless (07:21):
• 0:28
  Yeah. I guess everyone expected China to scramble for replacement barrels, and instead we saw the imports fell. Why wasn't the economy there hit harder?
• 0:29
  Michal Meidan (07:35):
• 0:30
  So I think there's a couple of factors. And I think exactly as you were saying, not only did we expect them to scramble for crude, we expected them to draw down on reserves. That was exactly the rationale of this massive stockpiling. I think we have to be a bit careful when we talk about the economic impacts because there have been economic implications for China. They did not have to resort to fuel rationing like a number of Southeast Asian countries. They didn't have to mandate work at home. But after a three-year deflationary run, there was an increase in inflation. So there is pressure on some of the buyers that the downstream users are facing growing price pressures, especially if you think about the fact that it's not just the crude oil that was disrupted from the Middle East, it's petrochemical feedstocks, it's gas, it's LNG supplies, and a number of provinces.
• 0:31
  (08:33):
• 0:32
  So Jciangsu Province for instance, which is a big producer of chemicals, a big importer of LNG, and also China's largest producer of solar panels had that compounded impact from these losses. Independent refiners that rely on Iranian crude lost that Iranian crude. So there was impact, but overall the Chinese economy was relatively well spared and that is because of the demand response, the behavioral adjustment in the face of higher oil prices.
• 0:33
  Erica Downs (09:04):
• 0:34
  And just to pick up on the behavioral response, one of the tools that Beijing was able to deploy to help cushion the blow of the Hormuz disruptions on Chinese consumers has to do with the ability to set prices for diesel and gasoline. In normal times, China sets prices, prices fluctuate in line with fluctuations in global crude prices. But because these are state set prices, the government can step in in emergency situations. And what we did see is that Beijing did not allow a full pass through of the international crude prices, so the prices refiners would've been paying for oil on the market to consumers. However, if you look at the levels at which they set prices, they were still higher than before the war. So consumers were feeling higher prices at the pump, as Michal said, and there's been a lot of anecdotal information about how consumers were using.
• 0:35
  (10:26):
• 0:36
  There was greater EV use, there was greater EV taxi use, greater use of subway and rail. And so those were some of the adjustments that were brought about as a result of the levels at which the prices for diesel and gasoline were set.
• 0:37
  Michal Meidan (10:44):
• 0:38
  To contextualize it as well, in the broader economy, when we think about the economy and the energy system, we all know the headline China imports 70% of its oil use and 50% of that comes from the Middle East, so it's a massive shock, but oil is 20% of China's energy mix. And if you look at the bigger picture, 85% of China's energy supplies come from domestic sources, coal, nuclear, hydro, renewables. So actually this disruption in the bigger scheme of things is hugely impactful for drivers, again, where we've seen behavioral adjustments for planes, but it didn't impact the power system, for example. So the economy can keep running even when there's an oil shortage or even when oil prices are higher because it has alternative fuels and additional fuels and redundancies in the system that in this case are actually really useful.
• 0:39
  Bill Loveless (11:43):
• 0:40
  That's interesting. And it's important to put that perspective there for us to consider because again, I think lately we've just been focused on the oil market, right Erica, and not necessarily on the broader energy picture in China. I just wonder, is this a story of successful planning by China or simply fortunate circumstances?
• 0:41
  Erica Downs (12:06):
• 0:42
  I think there's clearly an element of successful planning. For example, if we take China's oil stockpiles, China has been building and filling those facilities for over 20 years. China's shifted to a net oil importer in 1993, and soon after that, discussions about whether the country needed oil inventories and what size inventories began. And of course, as Michal mentioned, it looks like at the start of the war, they had 1.4 billion barrels in storage. So that was certainly the result of planning precisely for this type of situation, that there was a real sense in China that their growing dependence on imported oil was a real vulnerability and the disruption of the flow of those supplies to China, especially through key transit choke points, was really the nightmare scenario. So that clearly speaks to an element of planning. And I would also say that if you look at the electrification of road transport in China, again, that's something that was developed in part with the oil import dependence vulnerability in mind.
• 0:43
  (13:40):
• 0:44
  So I think there clearly is, this is in large part a story of successful planning, but I think what we didn't know, and I don't think China knew as well, was how this is their first chance to really test drive the different tools that they had to manage an oil supply crisis, that there just hasn't been one of this magnitude before. And so I think a big question for China and certainly for those of us on the outside was how well were they going to be able to manage it? And I think they have done quite a good job. So it was yes, successful longer term planning, but it also has to do with, I think, smart decision making in the moment in terms of what policy levers to pull and when and to what extent.
• 0:45
  Michal Meidan (14:37):
• 0:46
  Sorry, if I could just add to that on the planning, as Erika was saying, the additional successful policy was to cap the share of the Middle East at around 50% of total imports. That has been maybe an informal policy, but if you look at the data, the Middle East has been at around 50%. So while that is really big, you can flip it and say there's another 50% that comes from elsewhere. Compare that to Japan that relies on the Middle East for over 90% of its imports, then China is much better hedged with the ability to tap into alternative sources of supply. But there was also an element of a fortunate circumstance or perhaps within that enabling buffer that China had developed, the response was very market oriented. And I think that was another very surprising thing. Margins were squeezed, so refiners cut runs. Crude was expensive, so they didn't buy it, but that was enabled, I think, by all these buffers in those decades of planning.
• 0:47
  (15:41):
• 0:48
  And I think also a lot of Chinese stakeholders were caught off guard by the demand response, but also by their ability to be quite flexible within those constraints.
• 0:49
  Bill Loveless (15:52):
• 0:50
  The strategic reserves did play a big role in China's response to this crisis, Erica. And yet, how do we know exactly what's happening when it comes to their reserves? How confident can we really be in China's oil data or in our ability to infer what's going on there?
• 0:51
  Erica Downs (16:14):
• 0:52
  So I'll first make a few comments about oil data and then link that to the oil inventory issue. I think when you look at China's oil data, the government routinely publishes data on refinery runs, on domestic oil production, on oil imports and exports. And I think all of that provides a good picture of trends over time. And certainly when it comes to looking at oil import data, if you're looking at trade with certain partners, I think that tends to be pretty reliable just because I suspect that China knows that there are other countries out there that are publishing data that can also show what's happening. And then when it comes to China's oil inventories, the government does not publish data about the amount of oil that it has in storage. And so for analysts outside of China, we're left to come up with implied inventory levels.
• 0:53
  (17:29):
• 0:54
  And so when it comes to figuring out how much oil China is adding or removing from storage in any given month, I think what a lot of analysts do is they just look at net crude imports plus domestic production, and then they subtract refinery runs from that. And then there are also tanker tracking companies and there are companies that use satellites, sorry, to look at tank farms and depending on the shadows cast, they'll come up with estimates about how full those facilities might be.
• 0:55
  Bill Loveless (18:10):
• 0:56
  So there's a fair amount of. You have to put together a lot of different pieces, observations to come up with some estimate of what is actually occurring in that market, in that oil market.
• 0:57
  Michal Meidan (18:22):
• 0:58
  Yes.
• 0:59
  Bill Loveless (18:23):
• 1:00
  And so the impression I get, I was going to ask before how much credit belongs to stockpiling versus demand reduction, but it seems as though it's really a combination of both. That seems to be what you're saying, Michal.
• 1:01
  Michal Meidan (18:33):
• 1:02
  Yes. So again, if you look at the data and the numbers are problematic, but half of that reduction was a combination of not stockpiling and then the stock draws that did occur, and the other half was run cuts and reduced refining activity.
• 1:03
  Bill Loveless (18:51):
• 1:04
  I've read about the so-called Malaka dilemma, and as I understand it, years ago, Chinese strategists worried constantly about the Malacca dilemma, which refers to China's strategic vulnerability due to its heavy reliance on the Strait of Malacca, that crucial maritime choke point for its energy imports and trade. Has this crisis simply shifted that concern to Hormuz or has China actually reduced its vulnerability?
• 1:05
  Michal Meidan (19:22):
• 1:06
  I mean, I think it's hard to say that China has reduced its vulnerability because the import dependence is still there. The choke points physically exist. What the crisis has shown is that China has tools to manage this vulnerability and to, I guess, limit the knock-on effects on the running of its economy. And the crisis isn't over, we still don't know how this plays out, so we can't assume, and I know a lot of headlines want to be about winners and losers and saying that China's won. So the vulnerability still exists, but China has hedged against it quite significantly. I think what's interesting, that combination of stockpiles, of supply diversification, of fuel diversification, and the electrification of end users and transport fuels, which is really gaining momentum in China, that means that gasoline and diesel demand have peaked in China and peaked already two, three years ago.
• 1:07
  (20:23):
• 1:08
  This year, both Sinopec and CNPC, the two largest oil companies in China, are saying that oil demand more broadly has peaked. And so to a certain degree, and the Chinese thinking oil is yesterday's story, they've got some safeguards around those vulnerabilities, but the 15th five-year plan is all about a new type energy system. It's electrification and the vulnerabilities associated with the power sector. How do you manage flexibility? How do you manage resilience? But it increasingly feels like it's hard to say that oil is an afterthought because again, it's still a huge chunk of a huge amount of flows. But the focus for energy security is really starting to shift, I think, to the power system.
• 1:09
  Bill Loveless (21:10):
• 1:10
  I'm thinking, Michal, as you said that oil is yesterday's story, the old journalist in me says, "Boy, that's the headline."
• 1:11
  Erica Downs (21:20):
• 1:12
  And on that, I actually wanted to pick up on that point briefly. As I've been following what analysts in China have been saying about this crisis and about China's energy security and energy security in general, one of the things that has stood out is the view that the source of global energy security is shifting away from control of resources like oil to control of technology. And from this perspective, China sees itself as very well positioned in this new world where energy security is technology, both in terms of being able to secure and ensure their own energy security, but also in being able to sell those technologies and market technology as energy security to other countries, especially states in Asia that have been especially hard hit by the disruption of energy exports through Hormuz.
• 1:13
  Michal Meidan (22:31):
• 1:14
  I think you could take that even one step further. In the Chinese thinking, it is energy security, but also reliable energy supplies underpin industrial activity, industrial growth, technological advances, and AI. That's where competition with the US lies today, and that's whereby having a resilient and diverse energy supply structure and energy supply system, that's where you win, hopefully potentially from the Chinese perspective, the race with the US.
• 1:15
  Bill Loveless (23:03):
• 1:16
  Erica, China has been Iran's largest oil customer. How has the conflict altered that relationship?
• 1:17
  Erica Downs (23:11):
• 1:18
  When the conflict first started, the relationship basically continued business as usual, because Iran was letting tankers transporting Iranian crude pass through the Strait of Hormuz. However, things began to change with the US blockade that went into effect in mid-April. There was a brief period, I think starting in mid-June with the ceasefire that has now fallen apart where we did see more supplies exiting Hormuz, but obviously with the reimposition of the blockade, Iranian barrels that need to transit the Strait of Hormuz to get to China aren't doing so. And I say need to transit Hormuz because at certainly the start of the conflict, Iran had a lot of oil and floating storage around Asia, although as that storage continues to be tapped, supplies are dwindling. And it's important to point out that the main buyers of Iranian crude in China are these small independent refineries called teapots.
• 1:19
  (24:24):
• 1:20
  And one of the reasons they have bought so much Iranian crude in recent years is because they were able to get it at a discount. And since they operate on very thin margins, obviously discounted barrels were quite attractive, but I've recently seen press reports that to the extent that they can still buy Iranian crude, it's actually more expensive than the prices that they can get on other Middle Eastern barrels. And so they're starting to take those instead.
• 1:21
  Bill Loveless (24:57):
• 1:22
  So there has been some shift, some obvious shift that's taken place in recent weeks.
• 1:23
  Erica Downs (25:02):
• 1:24
  Yeah, and I think maybe be a little bit of an aside, but again, if you look at the teapots and the fact that sanctioned crudes have made up such a big part of their diet, what's happened in Venezuela and what's happened with Iran, it really has been bad news for them.
• 1:25
  Bill Loveless (25:22):
• 1:26
  Yeah. What future is there for these teapot refineries, these small refineries in China?
• 1:27
  Erica Downs (25:28):
• 1:28
  So I guess I'm happy to offer a couple thoughts and then see if Michal has anything to add. I mean, I sort of look at this in two ways. One way is that Beijing has been trying for decades to permanently close a lot of these facilities, and it's sort of part of this bigger ongoing plan to concentrate China's refining facilities in world-class integrated refining petrochemical projects located along China's coast. But at the same time, I did want to pick up on what Michal was saying about redundancies, because I do wonder if one of the takeaways from this ongoing for crisis is that redundancy can be a good thing. And so I do wonder, does that mean that certain independent refineries might be sticking around for longer?
• 1:29
  Michal Meidan (26:35):
• 1:30
  Yeah, I would certainly agree with that. And I think we've got these opposing pressures or the postmortem of the crisis when it actually ends. We're already seeing signs of that is, on one hand, the need to maintain supplies, domestic production of the upstream, but also domestic refining capacity. Again, if you go back to the 1990s when China became a net importer, part of the decision was, or an acceptance that they would have to rely on imported crude, but that they wouldn't rely on imported products, and that's when China began building a massive refining industry that is today the size of the US, the same sort of nameplate capacity as that of the US in order to be able to produce products. So we're seeing on one hand that the availability of supplies and even redundancies has been positive, but on the other hand, this shift in demand, so there's a temporary behavioral adjustment, but equally a desire to move faster with electrification, that will leave that over capacity at a much bigger share and will create more pressure for the teapots.
• 1:31
  (27:42):
• 1:32
  Now, for now, I think even the local provincial government wants them to stay alive. They've sort of proved themselves useful, they're a source of growth for the economy, so there will be an incentive for them to stay. Interestingly, the 15-year plan on oil and gas also says we will. Not verbatim, I'm paraphrasing, that we will tolerate some redundancies in refining exactly for energy security. But I think the question for them will be how do they adapt to a world with less lower cost or discounted feedstocks because they need to compete not just with the majors, but with the vertically integrated independents that are much more sophisticated and a system that's moving towards chemicals. Can they adjust? And some of them will, but some of them I think will struggle to adjust and shut down. But overall, in terms of the balances, will that change things materially?
• 1:33
  (28:39):
• 1:34
  I mean, I think, again, we'll have to wait and see, but I'm slightly concerned that over capacity will only go and increase, but just move from products to chemicals.
• 1:35
  Bill Loveless (28:46):
• 1:36
  Interesting. Showing a lot of flexibility there as well as planning that sort of takes into account circumstances in global oil markets, but also the flexibility that's proven to be an advantage. Erica, China's substantial reduction of its crude oil imports has led to some speculation that China is the new OPEC. What do you think about this? Does that make sense?
• 1:37
  Erica Downs (29:09):
• 1:38
  Michal and I have actually been talking about this recently.
• 1:39
  Bill Loveless (29:15):
• 1:40
  Hence the speculation, huh?
• 1:41
  Erica Downs (29:18):
• 1:42
  Yes. So my take on this is that China did not set out to actively manage global oil prices. At the start of the crisis, China's objective wasn't to save the world from $200 per barrel oil. Its objective was to basically to save itself. It wanted to buffer the Chinese economy, and I think that's the way to understand the different steps that they took. And in terms of being focused on saving themselves, which that's not unlike what many other governments have done in this situation. It's sort of worth pointing out that China did cut back on refined product exports and that clearly was painful for some of the countries that rely on China for supplies. China's not a big product exporter, but I think Australia, for example, got a lot of jet fuel from China and those volumes were decreased. And again, I think that just illustrates that the focus was on domestic supply security.
• 1:43
  (30:40):
• 1:44
  So that's one point. Second point I would make just to state the obvious is that this is the first time that China has really substantially dialed down its crude oil imports. So this is sort of a new tool, whereas if you look at OPEC, they've been actively managing the oil market for decades. And so this is basically a new tool that China has. And while they've been able to wield it effectively, really effectively during this crisis, I think doing this in a non-crisis situation might be something that's a little bit more difficult to pull off.
• 1:45
  Bill Loveless (31:30):
• 1:46
  Not necessarily, Michal, a protracted role for China to play.
• 1:47
  Michal Meidan (31:35):
• 1:48
  I don't think so. And just to add to what Erica was saying, we can illustrate it with some numbers where China didn't set out to save the world or there is a variety of conspiracy theories about why China's keeping prices low to keep the US engaged in the war or keeping products at home so that prices at the pump in the US are high. I mean, there's a myriad of conspiracy theories, but China wanted to save itself in its economy. You just do very simple back of the envelope calculation. A country that is importing, let's call it 11 million barrels a day at $65 versus $100, that's $400 million a day for that additional expenditure. Play it out over a year, that's like the equivalent of the GDP of Ecuador or Kenya. So you want to save that money and that makes sense to dial it down.
• 1:49
  (32:30):
• 1:50
  And again, on the product exports, China didn't export also diesel to Australia. That's the diesel used in mining of coal and iron ore that China then buys. So these markets, as you know very well, are so complex and interdependent that for China to try and use this as a tool, I think is extremely complicated because of unintended consequences. I think the other question then becomes why would it use it? If it wants lower prices, which are good obviously for it as an importer and maybe it wants shale to die, it would also hurt its own upstream. Let's not forget China produces four million barrels a day. It's the fifth or sixth largest oil producer. So lower oil prices hurt its own self-sufficiency goals in the upstream. If it were to try and push prices higher, again, that would squeeze its own downstream industries, create inflationary pressure.
• 1:51
  (33:27):
• 1:52
  So it's a very tricky thing to use. And as Erica said, they've used it defensively as a buffer, but it's a very complex tool to use. And I think if we think about another word that's been sort of bandied around is weaponization, China has other tools like rare earths where it has complete monopoly or almost complete monopoly and dominance where it can inflict pain on competitors or rivals. Whereas in the oil story, again, it also has implications for allies, for the Gulf countries, for partners and countries that it trades with. So it just feels like a very complex matter for China to start dabbling in market management.
• 1:53
  Bill Loveless (34:12):
• 1:54
  But it seems, Michal, that China is a big winner from this conflict in the Middle East, regardless of whether or not it may have had a grand strategy for coping with a situation, an extreme situation such as this one.
• 1:55
  Michal Meidan (34:24):
• 1:56
  I hesitate to say that it's a winner, not just because obviously it's a horrible conflict and there are downsides to various parts of its economy. Think about the implications for global growth and what that means for China's export oriented industries, which are a big driver of economic growth. We just don't know yet. Certainly its policies have been vindicated. It is diplomatically and rhetorically doing victory laps right now around the world about how it saved the markets. But I think it is more complicated than that. Its ability to really benefit from increased exports of clean tech. I think Erica was saying the other day that the data isn't all that compelling. And yes, there are increased exports, but a lot of countries are now having many fiscal issues. So how much more can they lay out to develop new energy infrastructure? So I think it's a mixed bag.
• 1:57
  (35:25):
• 1:58
  Yes, we can say that China has, again, its policies have been vindicated. It has certain considerable advantages both in terms of its economic resilience and diplomatically, but I think winner goes a bit too far.
• 1:59
  Bill Loveless (35:39):
• 2:00
  Erica, what should policymakers in Washington learn from China's response?
• 2:01
  Erica Downs (35:45):
• 2:02
  High level takeaway that I would flag is that China's oil import dependence is not the Achilles heel that so many people in Washington and Beijing and elsewhere have long thought that it was. So I think that's takeaway number one, that China has the tools to manage through a major supply disruption, the largest oil supply disruption in history and to do so calmly and confidently. I think that China's ability to do this, just to pick up on some of the diplomatic issues that Michal was mentioning is that I think it really gives them a lot of room to maneuver diplomatically in terms of how involved do they want to get in trying to resolve these crises and in what way? That since the start of the conflict, we have seen officials from the Trump administration call on China to do more, to reopen the Strait of Hormuz.
• 2:03
  (37:07):
• 2:04
  And putting aside the fact that even if China was managing the conflict less well, the supply disruption less well, it probably would not be inclined to help end a war that it did not start and was not consulted about. But I think they can sit back and play more of a background role, the type of role that I think they're comfortable with in terms of trying to facilitate talks, trying to get people to return to the negotiating table. So that's one of the takeaways that I would highlight.
• 2:05
  Bill Loveless (37:46):
• 2:06
  Michal, should countries rethink what constitutes an adequate strategic petroleum reserve in light of the experience in China?
• 2:07
  Michal Meidan (37:56):
• 2:08
  Well, I think the global experience and the IEA's SPR releases showed that those buffers have worked, that the policies, I think they certainly cushioned the price impact at the beginning of the war. So I don't know that our global SPR levels have been inadequate, but so clearly we need to replenish those and maybe think about increasing them. I mean, again, Hormuz was the unthinkable. So the next question then becomes what is the next unthinkable that we have to start thinking about? And maybe China's lesson is not just the strategic petroleum reserves, it is redundancies, it is diversified fuel mixes. Although China is heavily reliant on coal, so it's not that diverse, but a diversification in terms of the fuel mix of suppliers and that cushion of strategic petroleum reserve, I think that's a lesson, but that's an expensive lesson. China has spent a lot of money and there's lots of economic inefficiencies associated with the way it runs its economy and maintains that energy system.
• 2:09
  (39:04):
• 2:10
  So yes, it's a lesson. Is it applicable to Western countries or to advanced economies or to liberal economies? I don't know.
• 2:11
  Bill Loveless (39:13):
• 2:12
  So Erica, I'm wondering that based on our conversation, is the next energy security race less about finding more oil than about needing less oil?
• 2:13
  Erica Downs (39:26):
• 2:14
  I would say going back to some of the issues we touched on earlier, that it's a technology race. I mean, that's certainly how it's viewed in China. If you look at China's going back to the 15th five-year plan for the period 2026 to 2030, one of the goals in that plan is to become an energy powerhouse or an energy superpower, which given China's dominance of clean energy technologies and how they've come through this crisis relatively unscathed, it may seem odd that China doesn't think of itself as an energy superpower yet. And when I was trying to figure out why, one of the issues that came up was that China doesn't control all of the technologies that it needs to run its energy system. And one of the ones that they don't control to the extent that they would was the manufacturing of heavy duty gas turbines, which are used for powering data centers.
• 2:15
  (40:45):
• 2:16
  And this is something they've been working on for a long time, but I think their view was that turbines are maybe not quite yet at the level of some of the leading Western manufacturers. And so I just use this as an example to show that in China, it's very much viewed as a technology race. And well, I think they feel they are very well positioned given all the investments in clean tech and the innovation that they've carried out, it's technology.
• 2:17
  Bill Loveless (41:22):
• 2:18
  Yeah, interesting. Michal, I can't help but come away from this conversation thinking that China has demonstrated a degree of resilience that changes how we think about global energy security. I mean, is that a fair observation?
• 2:19
  Michal Meidan (41:37):
• 2:20
  Absolutely. I think there are definitely lessons from China about what is resilience and how to manage an economy. The question again is what is taken away by different countries? Because one lesson for Southeast Asian countries potentially is that coal is another good buffer. Coal to chemicals was a big part of the response in the petrochemical sector. Using local resources, including coal and renewables, is one solution or potentially one takeaway that comes from this. So there's that element. I do think we also need a more holistic thinking about what is energy security. Again, as China is showing by this talk of the new power energy system and electrification, grid flexibility, the 15th five-year plan again is sort of an engineering guide to how you add flexibility into the system with battery storage and virtual power plants and demand side management and lots of other things. But when I look at it from Europe, from a European perspective, yes, we need to add all those tools.
• 2:21
  (42:47):
• 2:22
  We also need to upgrade our grids and we need to think about constant cyber attacks and others from Russia. So energy security in this world of technology and electrification I think looks very different. And we might not be getting that.
• 2:23
  (43:04):
• 2:24
  I mean, my concern is that this war is refocusing us on the oil and gas choke points and on alternative supplies, especially in Europe of oil and gas. Although there's a big electrification plan, a lot of industries here are based on gas. Do we learn the right lessons? Do we think about energy security? Again, not just as oil and gas vulnerabilities, but also what electrification look like, what power grids and markets should look like and how to develop resilience for this new era that we're in, right? I think it's not just a new energy era that we're in. I dare say that we are in a slightly different geopolitical era.
• 2:25
  (43:43):
• 2:26
  And how do we calibrate our thinking around energy security is something that I think we need to be doing more of in a broader and more holistic way.
• 2:27
  Bill Loveless (43:50):
• 2:28
  Erica, I'm interested what you and Michal will be looking at going forward based on what you've learned from your experience so far in China.
• 2:29
  Erica Downs (44:00):
• 2:30
  So I actually do want to make one comment in response to your last question. I'm glad that Michal mentioned coal and coal to chemicals because that was something I did want to bring up today. And so despite all my talk about technology, I am going to circle back to coal and developing the capacity to produce oil, gas, petrochemical feedstocks from coal is something that China, again, has been working on for a long time. Even before February 28th, I think it was an area where they did want to see some increase in capacity. And so one question is to what extent does this conflict add impetus to developing these types of projects? I mean, certainly the coal industry, the coal to chemical industry has sort of seized on the crisis to foot stamp on the importance of coal as a source of energy security. I think there was at least one sort of new project green lighted during the crisis.
• 2:31
  (45:11):
• 2:32
  I imagine that had been going through the approval process pre-war. And so I think that's sort of something to look at in part because these projects can be very bad for the climate in terms of the emissions. And so it's sort of how far they go in developing coal conversion projects, I think gives a sense of how they're balancing their energy security and decarbonization goals when those things come into conflict.
• 2:33
  (45:45):
• 2:34
  And then I guess looking ahead, so the piece that we did for the blog was very much looking back and trying to explain the mystery of China's declining oil imports. And I think one of the things that we are going to be doing next is looking forward and trying to understand where China's oil demand is headed, not just in terms of things that have happened during the crisis, increased electrification of transport, for example, on top of what was already occurring, but also what else are we likely to see in light of the fact that this is the beginning of the 15th five-year plan period and we are seeing new plans that are continued to be rolled out.
• 2:35
  (46:42):
• 2:36
  For example, a plan to increase the electrification of heavy duty trucks, which is going to be negative for diesel and for LNG to the extent that LNG is also used to power these vehicles.
• 2:37
  Bill Loveless (47:00):
• 2:38
  Michal, do you have any unanswered questions?
• 2:39
  Michal Meidan (47:02):
• 2:40
  Oh, a million.
• 2:41
  (47:05):
• 2:42
  So that's one project that we're looking at is what is structural and what is cyclical in terms of the demand response and how can we think about these changes? We're also planning to look a little bit at this question of is China the new OPEC? So those are some of the questions. I think the sort of political dynamics in the energy sector are really interesting. In terms of that response that we saw, the government, it felt like, again, the government has all these policies in place and initially obviously there was a bit of a panic and a bit of a scramble, but then there seemed to be a lot of back and forth with the refiners about what makes sense economically and what is efficient. And I find that fascinating to try and unpack the inner workings of, and this is something that actually Erica and I did.
• 2:43
  (47:55):
• 2:44
  We looked at personnel changes in the Chinese oil sector, I think it might've been 10 years ago, but just looking into that black box of the politics and how decisions are made and what happened in the initial phases of this crisis, the decision to ban oil product exports and then release them a little bit, that kind of back and forth between government and corporate stakeholders I think is fascinating.
• 2:45
  Bill Loveless (48:19):
• 2:46
  There are any number of black boxes, and that's often the case when you're talking about China, but nevertheless, the country's significance in these markets is so important. It's so urgent for us to understand. Michal Meidan, Erica Downs, thanks again for taking time today to discuss this with us on Columbia Energy Exchange.
• 2:47
  Erica Downs (48:38):
• 2:48
  Thanks for having us.
• 2:49
  Michal Meidan (48:39):
• 2:50
  Thank you so much.
• 2:51
  Bill Loveless (48:46):
• 2:52
  That's it for this week's episode of Columbia Energy Exchange. Thank you again, Erica Downs and Michal Meidan, and thank you for listening. The show is brought to you by the Center on Global Energy Policy at the Columbia University School of International and Public Affairs. The show is hosted by Jason Bordorf and me, Bill Loveless. Mary Catherine O'Connor, Dara Diamond, and Kyu Lee produced the show. Greg Vilfranc engineered it. You'll find more information about the show or the Center on Global Energy Policy, including Erica and Michal's blog online at energypolicy.columbia.edu or follow us on social media at ColumbiaUenergy. If you like this episode, leave us a rating on Apple, Spotify, or wherever you get your podcast. You can also share it with a friend or colleague to help us reach more listeners. Either way, we appreciate your support. Thanks again for listening. We'll see you next week.