The implications of closing the Strait of Hormuz oil route on China

The Israel-Iran conflict has oil traders and shipping firms focused on the Strait of Hormuz -- a critical chokepoint for Middle East energy exports. A blockade by Iran would have global implications for inflation and oil prices, but arguably the disruption would be most keenly felt in Asia-Pacific countries -- the key destination for Persian Gulf oil.

By some estimates, 20% of global oil and liquefied natural gas (LNG) shipments transit this waterway; as the eastern end of the Persian Gulf, sea access to not only Iraq, Kuwait, Qatar and the United Arab Emirates would be at risk, as well as Saudi Arabia's eastern coast -- home to massive oil export hubs like Ras Tanura. (The Saudis can also pipe oil to export from their Red Sea coastline, but this route has less capacity than the Persian Gulf facilities.)

As China is the world's biggest oil importer, we've charted the sources of its crude shipments since 2008 -- grouping the key Gulf exporters that transit Hormuz (excluding Iran) in purple, and most of the rest of the world in green.

An interesting complicating factor is the role of Malaysia, which has emerged as a major trans-shipment hub. (As our third chart indicates, Malaysia is a significant oil producer on its own, but its exports have now surpassed its own domestic production.)

Industry estimates suggest that around 10% of China’s oil imports are accounted for by crude that is pumped in Iran and then routed through Malaysia -- often to independent Chinese oil refiners known as "teapots." (As our charts indicate, official customs figures show that the last direct Iranian oil exports to China took place in 2022.)

As a sign of China's influence as a customer, US Secretary of State Marco Rubio has called on Beijing to press Iran not to close the strait.

China has been accelerating its diversification efforts, including expanding pipeline infrastructure from Russia -- a nation we've also highlighted. Russia has already surpassed the Saudis in recent years as China's no. 1 source of crude, accounting for about 18% of imports.

After China, India and Japan are the top crude importers from the Gulf. Our last chart examines PPI inflation trends in some of the largest Asia-Pacific nations, highlighting periods of high correlation with the oil price. (We've also marked a previous Iranian threat to to blockade the Strait -- in early 2012, in response to sanctions.)

As of the time of publication, Iran's parliament had authorized a potential closure of the strait, but vessels are still transiting the waterway. For now, shipping firms have judged that a blockade would be too much of an act of self-harm for Iran to act on its threat.