The US-Iran War and an Unprecedented Energy Crisis: How Is China Responding?

04/04/2026

The China Academy and Charriot Chai
Mar 31, 2026

Since March 1, the Strait of Hormuz has been closed for nearly a month following the US invasion of Iran. The International Energy Agency (IEA) has issued a stark warning, with Executive Director Fatih Birol characterizing the situation as “the greatest global energy security challenge in history.”

While the Trump administration has played down the economic fallout, the president himself posting on Truth Social that rising oil prices are “a very small price to pay for U.S.A., and World, Safety and Peace.” Professor Wang Xiangsui, Deputy Secretary-General of the CITIC Reform and Development Research Foundation, argues that the IEA’s assessment is anything but alarmist.

I. The Storm Ahead Will Be Fiercer Than Any Before

The IEA applies a rigorous framework for defining a global energy crisis, encompassing three dimensions: physical supply chain disruption, price shock, and macroeconomic impact. The blockade of the Strait of Hormuz is now pushing all three toward their breaking points.

Physical disruption. According to Goldman Sachs, the estimated loss of Persian Gulf oil flow currently stands at 17.6 million barrels per day — roughly 17% of global supply and 18 times the peak disruption seen during the Russian oil supply shock of April 2022. Actual throughput in the Strait has plunged from a normal 20 million barrels per day to just 600,000 — a 97% drop, well past the 95% threshold that defines a full blockade.

Trump has called on allied nations to deploy naval forces for joint convoy operations, but retired Vice Admiral Kevin Donegan, former commander of the US Fifth Fleet, has pointed out that military escorts could restore at most 20% of normal oil flow. Even factoring in an additional 15–20% via overland pipelines, the gap remains enormous.

Price shock and economic fallout. Goldman Sachs projects that if the blockade persists beyond 60 days and Middle Eastern energy infrastructure suffers lasting damage, Brent crude could surge to $110 per barrel by Q4 2027. Should prolonged supply weakness fuel sustained market anxiety over further disruptions, prices could even surpass the all-time record of $147 per barrel set in 2008. What would such an energy price shock mean for the global economy? Goldman Sachs economist Joseph Briggs offers a rule of thumb: every 10% increase in oil prices shaves more than 0.1% off global GDP and pushes core inflation up by 0.03 to 0.06 percentage points — with Asia and Europe bearing the brunt.

Professor Wang goes further, estimating that if the blockade exceeds 90 days, the oil crisis could metastasize into a global financial crisis, potentially triggering a deep structural recession. Two warning signs, he argues, suggest the war may indeed drag on longer than markets expect.

First, the ceasefire conditions demanded by both Washington and Tehran far exceed what either side can realistically deliver — nowhere near the stage where meaningful bargaining can begin.

Second, the conflict is evolving into two parallel wars — each side fighting on its own terms. On the military front, the US retains a clear advantage in raw firepower but lacks effective means to quickly reopen the Strait or prevent Iran from continuing to strike American allies across the Middle East. Although the Trump administration has recently begun mobilizing Marines — signaling a possible ground campaign — a force of roughly 10,000 troops is far too small to achieve decisive results in Iran. If the Iraq War is any guide, the outcome could cut either way. Iran, for its part, cannot contest American air or naval supremacy, but by choking the Strait of Hormuz, striking Gulf oil infrastructure, and coordinating with Yemen’s Houthi forces, it holds the initiative on the economic battlefield. Neither side can make meaningful headway on the terrain where the other holds the advantage — a dynamic that points toward a prolonged conflict.

In short, all three indicators of a global energy crisis are accelerating toward critical thresholds, while the prospects for peace and the reopening of the Strait remain distant. The IEA’s concerns are far from unfounded. The storm clouds are not just gathering — the wind is already howling.

II. What China Has Done and How It Managed to Do It

In response to the looming crisis, the US government has rolled out a series of policy measures: lifting sanctions on Russian and Venezuelan oil, suspending the Jones Act for 60 days, and coordinating the release of 172 million barrels from the Strategic Petroleum Reserve. These steps have been timely, to be sure. Yet as Goldman Sachs’ chief US political economist Alec Phillips has noted, US strategic reserves have already fallen below 60% of capacity and are projected to drop to just 33% by mid-year, leaving limited room for further drawdowns.

China’s policy toolkit, by comparison, has been both swifter and more targeted.

Just four days after the Strait closed, Beijing announced a suspension of refined oil exports to prioritize domestic supply. By day 22, the National Development and Reform Commission (NDRC) activated temporary price controls, effectively absorbing half of the price increase on behalf of consumers.

Professor Wang emphasizes that these rapid responses have been critical in slowing the transmission of energy price shocks through the broader industrial chain. They buy time for manufacturers and the transportation sector to seek alternative energy sources or accelerate the transition to renewables. Though the global energy landscape is in turmoil, these two measures have served as a buffer — giving Chinese businesses precious time to brace for impact.

What’s more, Professor Wang notes, these measures don’t just reflect the speed of China’s crisis response — they vindicate more than a decade of sustained investment in energy security.

On the policy front, since the 12th Five-Year Plan, China has been building a three-tiered reserve system integrating national, local, and commercial stockpiles. Total strategic petroleum reserve capacity now stands at 1.48 billion barrels, with actual inventory consistently above 1.29 billion barrels. This means that even under an extreme supply cutoff, China can maintain stable domestic supply for over 120 days.

On the technology front, China has pursued a dual strategy of expanding supply and reducing demand.

On the demand side, by 2025, China’s fleet of new energy vehicles has surpassed 43 million. These electric vehicles displace nearly 90 million tons of oil consumption annually — equivalent to a roughly 15% reduction in overseas oil dependence.

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On the supply side, China’s renewable energy generation reached 3.99 trillion kilowatt-hours in 2025, accounting for 38% of total electricity consumption. Wind and solar alone generated 2.3 trillion kilowatt-hours, a 25% year-on-year increase representing about 22% of the national total. A particularly telling statistic: in 2025, the 519.3 billion kilowatt-hours of new renewable generation exceeded the 516.1 billion kilowatt-hours of total new electricity demand nationwide. In other words, every additional unit of electricity the country needed was supplied entirely by clean energy — without burning a single extra drop of oil.

Beyond that, China continues to develop coal-to-liquids and coal-to-gas technologies as a strategic backstop. It is precisely this long-standing vigilance — and the relentless pursuit of energy security — that now gives policymakers the capacity and confidence to use short-term measures to create long-term room for maneuver.

III. But What If This Isn’t a Storm, What If It’s the Start of a Rainy Season?

Proactive preparedness is the bedrock of China’s energy security strategy. From building strategic petroleum reserves to diversifying energy imports to making early, aggressive bets on renewables, this system has proven effective at absorbing short-term shocks. But it is worth noting that the concept of preparedness implicitly rests on an assumption: that the crisis is temporary, and clear skies will eventually return. That assumption may not hold this time.

For one thing, energy infrastructure across several Gulf states has sustained permanent damage; restoring production lines and rebuilding capacity will take time. Beyond oil, the war has also disrupted exports of nitrogen fertilizers, aluminum, and petrochemicals from the Gulf region. Goldman Sachs estimates that rising fertilizer costs alone will push food prices in the US Personal Consumption Expenditures (PCE) index up by about 1.5% this year, with the impact concentrated in the latter half. Even if the Strait of Hormuz were reopened this instant and a ceasefire declared the next second, how long it would take for global energy supply chains — and their downstream ripple effects — to return to pre-war levels remains an open question.

Faced with this uncertainty, Professor Wang argues that not just China but every nation should be preparing for a more prolonged shock.

First, the “transmission pathways” of the crisis must be taken seriously. Energy is the bedrock of industry. Rising oil prices ripple through the industrial chain — from chemicals to logistics, agriculture to manufacturing — in a cascading sequence. Current price controls have effectively slowed this process, but if the crisis becomes protracted, the sustainability of fiscal subsidies, the limits of reserve drawdowns, and the production ceiling of alternative energy sources will all be tested. The right question to ask is not “when will the crisis end?” but rather “for every additional month it continues, how much policy space do we have left?”

Second, the crisis response toolkit needs to be more complete. Short-term measures like export controls on refined products and price subsidies serve as the first line of defense. Long-term strategies like the renewable energy transition and import diversification point toward structural resilience. But between these two horizons lies a gap that requires a set of transitional mechanisms — such as triggers for deploying coal-to-gas conversion when oil prices spike, tiered protocols for phased reserve releases, and targeted protections for critical supply chains. Not all of these tools need to be activated, but all must be ready.