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

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2:28Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal. And I'm Tracy Allaway. So, Tracy, we are recording this 1 p.m. March 4th, 2026. So one of those days where you have to nail the hour and the minute because who knows what's going to happen. Absolutely. Of course, we are in the midst of a war with the rent that started this past weekend. And it's been an 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.

3:07Yeah, 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 U.S., 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.

3:43But 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. Right. This is really important. So obviously in the U.S., 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 U.S. 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 major importers and China being one is obviously a very different dimension for them.

4:19Absolutely. 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. I will learn what a tea. I've known at times what a teapot refiner is. Wait, what's your impression? If someone says teapot refinery, what do you think? Don't put me on the spotlight. I just imagine a little refinery. Yeah, I mean, that's it, basically. All right. Well, that was a good guess. Yeah, it's easy. The teapot. Yeah, I guess it's kind of neat. I just think it has a cute name, and so I like thinking about it.

4:50Anyway, 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 deserve and need more exploration in this precise moment. And 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 OddLots. Thank you so much for having me. 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 in your general field of study.

5:22So my research focuses 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. 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.

6:04So 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 passed through the Strait of Hormuz, which is now closed. 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.

6:46Like, 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? 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, I'm very happy to hear you speak about them in your introduction.

7:35Yeah. And so the teapots are small, independent refineries. Many of them are clustered in Shandong province. 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.

8:20The national oil companies that were, you know, lifting, you know, all of Iranians crude to take back to China 10, 15 years ago are completely out of the Iran oil trading business because of concerns about U.S. sanctions. And just to bring this back to the teapots, you know, 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 U.S. dollar financial system. You know, these are global companies with global operations.

8:59They 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 in maintaining access to the U.S. 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. So I don't mean to go on too big of a teapot tangent. How's that for alliteration?

9:43Thank you. But how did we end up with this situation where we have these national refining giants in China, which I assume, you know, 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? 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 Shunli oil field, which historically was one of China's backbone oil fields.

10:27And 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. 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 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.

11:16And when I first started looking at the teapots, you know, around the time that they got permission to import crude, they had a pretty diverse slate of suppliers. But as sanctions on countries such as Iran, Russia, 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. 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, OK, 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.

12:04So 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? 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 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.

12:55And just to give you a sense of how important these are to the teapots, Reuters ran a piece, I believe, back in 2023, where they said they had calculated that China had saved$10 billion on crude oil imports by importing these sanctioned crudes. OK, so 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 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?

13:41Yeah, 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 U.S. taking control of the marketing of some of Venezuelans 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 turn to Iran and specifically to purchasing Iranian heavy crude, which is, you know, a decent substitute and, you know, certainly could be obtained at a discount.

14:24But 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 provide 120 days of China's net crude oil imports at the 2025 level. level. So, you know, what that means is that if all of, you know, China was unable to import any oil at all, which obviously isn't going to happen, they could, you know, rely on their stockpiles for four months of crude oil imports. And so if you look at sort of Iranian crude and, you know, perhaps other flows that might be disrupted by the closure of the Strait of Hormuz, you know, they're sitting in a pretty good position.

15:12Also, there is, you know, a good amount of Iranian and Russian crude in floating storage in Asia, off the coast of China and Malaysia. 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.

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16:47Just head to Pipedrive.com slash SimpleCRM to get started. That's Pipedrive.com slash SimpleCRM. Support for the show comes from Public, the investing platform for those who take it seriously. On Public, you can build a multi-asset portfolio of stocks, bonds, options, crypto, and now generated assets, which allow you to turn any idea into an investable index with AI. It all starts with your prompt. From renewable energy companies with high free cash flow to semiconductor suppliers growing revenue over 20 % year over year. You can literally type any prompt and put the AI to work. It screens thousands of stocks, builds a one-of-a-kind index, and lets you backtest it against the S &P 500.

17:24Then you can invest in a few clicks. Generated assets are like ETFs with infinite possibilities. Completely customizable and based on your thesis, not someone else's. Go to public.com slash podcast and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash podcast. Paid for by Public Investing. Brokered services by Open to the Public Investing, Inc., member FINRA, and SIPC. Advisory services by Public Advisors, LLC, SEC Registered Advisor. Generated assets is an interactive analysis tool. Output is for informational purposes only and is not an investment recommendation or advice.

17:51Complete disclosures available at public.com slash disclosures. Oh, could this vintage store be any cuter? Right? And the best part? They accept Discover. Accept Discover? In a little place like this? I don't think so, Jennifer. Oh, yeah, huh. Discover's accepted where I like to shop. Come on, baby. Get with the times. Right. So we shouldn't get the parachute pants? These are making a comeback. I think. Discover is accepted at 99 % of places that take credit cards nationwide. Based on the February 2025 Nielsen Report. You know, you mentioned the significance of the, you know, we're talking about the Iran-China trading relationship.

18:31How 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. Yeah. So. Venezuela is a smaller crude oil supplier to China than Iran. Last year, Venezuela, you know, supplied, you know, around 400000 barrels per day of crude oil to China. So you're just looking at, you know, a few very, very small share, three, four percent of China's total crude oil imports last year. However, you know, virtually all of that oil was going to the teapot refineries.

19:16So 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. Now, Secretary Wright did say a couple of weeks ago that, you know, the U.S. 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 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 U.S., you know, I think a big question for them is at what price?

20:03Yeah. Can we go back to China's strategic petroleum reserve for a second? Because I feel like the U.S. 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? 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.

20:58And 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 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 over the years.

21:55And, 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 sort of upheavals in oil markets, you know, just this calendar year with the U.S.

22:40actions 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. Yeah. Tracy mentioned, obviously, all the fights about the SPR in the U.S. under the Biden administration. And it's kind of weird because, like, you know, there's some question. Why does, you know, the U.S. 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 it's a little unclear what the point of an SPR is.

23:18And 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 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 when that time comes? Yeah, no, I absolutely think that is part of it.

24:01Ever since China 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. That's why we saw China build these pipelines to deliver oil overland from Russia and from Kazakhstan. And so given those concerns, given those fears that in the event of a conflict that fits China and the United States against each other, would 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 falling apart, at that point, China was heavily reliant on the Soviet Union for refined products needed to fuel its military jet fuel.

25:08And 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, looking sort of further back in time. They're 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 a tense relationship with another major power and having that major power, you know, squeezed the country with respect to imported oil products. Actually, this might be a good time to ask just about China's foreign policy more broadly.

25:50So 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 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? 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.

26:36Chinese 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, 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 assets side of the story.

27:24Joe, 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. Like everything imaginable was available there. And like when you went there, it felt very, very surreal, actually. Yeah, I would love it. That sounds like the most interesting thing I've heard of in Dubai. Nothing else. I've never nothing else about Dubai has ever made me. I can tell you more interesting things. There's the North Korean restaurants and things like that. Oh, I want to check out a North Korean restaurant.