Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to another episode of the Odd Lots Podcast.
Speaker 3: I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 2: So, Tracy, we're recording this one pm March fourth, twenty
Speaker 2: twenty six, and so.
Speaker 3: One of those days where you have to nail the
Speaker 3: hour and the minute because who knows what's going to happen.
Speaker 2: Absolutely, of course, we are in the midst of a
Speaker 2: war with the rent that started this past weekend, and
Speaker 2: it's been an extraordinary week in markets, massive surge in
Speaker 2: the price of oil, all kinds of concerns about the
Speaker 2: sheer logistics of getting oil other as well as other
Speaker 2: commodities out of that region. Who's going to be affected?
Speaker 2: The ramifications are just global for obvious reasons.
Speaker 3: Yeah, there's clearly a lot to talk about. There are
Speaker 3: some interesting angles in particular that you and I have
Speaker 3: been discussing, and we're going to try to hit all
Speaker 3: of those individually in a lot of different episodes that
Speaker 3: are coming up. But for this particular episode, we want
Speaker 3: to talk about something that you know, obviously the US
Speaker 3: Europe have kind of been i would say the main
Speaker 3: subject of a lot of the hand ringing or the
Speaker 3: focus at the moment. So Europe, we know, has had
Speaker 3: to grapple with higher energy costs for a while, and clearly,
Speaker 3: you know, all this chaos in the Middle East is
Speaker 3: not going to be good for that. But one thing
Speaker 3: that hasn't gotten as much attention is what this actually
Speaker 3: means for China, which is a huge, huge purchaser of
Speaker 3: oil from the Middle East.
Speaker 2: Right this is really important. So obviously in the US
Speaker 2: we're swimming with oil or an oil exporter. This could
Speaker 2: be very good also for our gas exports to Europe.
Speaker 2: I mean, already we've seen this big increase in gas
Speaker 2: exports from the US to Europe, particularly just in the
Speaker 2: wake of the ongoing war in Ukraine. So this could
Speaker 2: create further opportunities. But for all the countries that are
Speaker 2: you know, major importers, and China being one is obviously
Speaker 2: a very different dimension for them.
Speaker 3: Absolutely. Also, can I just say that this particular topic
Speaker 3: is finally, finally an opportunity to touch on teapot refiners
Speaker 3: in China, which I always wanted to do an episode
Speaker 3: on and for some reason we never got to it.
Speaker 3: But but now's our chance.
Speaker 2: I will learn what a tea. I've known at times
Speaker 2: what a teapot refiner is.
Speaker 3: Wait, what's your impression if if someone says teapop refinery,
Speaker 3: what do you think.
Speaker 2: Don't put me on the spotlight. I just imagine a
Speaker 2: little refinery.
Speaker 3: Yeah, I mean that's it basically, all right, that was
Speaker 3: a good guest. Yes, I just think it has a
Speaker 3: cute name, and so I like thinking about it.
Speaker 2: Anyway, I'm very excited to say, we really do have
Speaker 2: the perfect guest today to sort of talk about the
Speaker 2: energy dimension from some angles that have that deserve and
Speaker 2: need more exploration. In this precise moment, we're going to
Speaker 2: be speaking with Erica Downs. She's a senior research scholar
Speaker 2: at Columbia University's Center on Global Energy Policy and an
Speaker 2: expert truly in this field. Thank you so much for
Speaker 2: coming on odline.
Speaker 4: Thank you so much for having me just.
Speaker 2: For the sake of our audience. Why do you give
Speaker 2: us the sort of brief overview of your work? Tell
Speaker 2: us a little bit about what you do in your
Speaker 2: general field of study.
Speaker 4: So my research focus is primarily on the geopolitics of energy,
Speaker 4: and so I've been kept busy recently looking at China's
Speaker 4: energy relationships with Russia, with Venezuela, and of course this
Speaker 4: week with.
Speaker 3: Ran So why don't you sum up I guess China's
Speaker 3: relationship with energy at the moment. Then. The only thing
Speaker 3: I know in recent times that sort of hit the
Speaker 3: headlines is that China has been importing an enormous amount
Speaker 3: of oil, which both suggests that it needs oil and
Speaker 3: it's an important thing for its economy to work, but
Speaker 3: also that you know, maybe in the face of tider
Speaker 3: supply coming from the Middle East, it has something of
Speaker 3: a cushion.
Speaker 4: So yes, China has been putting a lot of oil
Speaker 4: into storage. They kick started Strategic Petroleum Reserve over twenty
Speaker 4: years ago and have been building it up precisely to
Speaker 4: have in moments like the one that we are in now. Now, China,
Speaker 4: as you mentioned, is a big importer of oil. About
Speaker 4: half the oil that China imports comes from the Middle East.
Speaker 4: Most of those Middle East oil supplies passed through the
Speaker 4: street of Horrmus, which is now closed.
Speaker 2: Talk to us a little bit about the volumes here
Speaker 2: that we're talking about. Tracy mentioned that obviously they're importing
Speaker 2: quite a bit and much of it keeping in storage,
Speaker 2: like Okay, we're talking about Iran or something. How crucial
Speaker 2: is that relationship? What do we know about its volume?
Speaker 2: What do we know about pricing? Tell us some more
Speaker 2: details about this particular bilateral trading relationship.
Speaker 4: Sure, So, last year China imported eleven point six million
Speaker 4: barrels per day, About one point four million barrels per
Speaker 4: day came from Iran, so that accounted for about twelve
Speaker 4: percent of China's crude oil imports. Now the main buyers
Speaker 4: of Iranian oil in China are the teapot refineries. I've
Speaker 4: been following the teapot refineries for a long time and
Speaker 4: I love to talk about them, So Joe could be
Speaker 4: very happy to hear you speak about them in your introduction. Yeah,
Speaker 4: and so the teapots are small, independent refineries. Many of
Speaker 4: them are clustered in Shandong Province. They are not as
Speaker 4: big or sophisticated as the refineries operated by China's national
Speaker 4: oil companies or the new integrated refining and petrochemical projects.
Speaker 4: These are world scale projects that have popped up in
Speaker 4: China over the past few years. So the teapots are
Speaker 4: much smaller, less sophisticated, and they rely on the discounts
Speaker 4: they can receive on sanctioned cruds to boost their bottom lines,
Speaker 4: and in some cases they probably depend on these crews
Speaker 4: for their survival. So they're the main buyers of Irani
Speaker 4: and creud in China. The national oil companies that were
Speaker 4: you know lifting you know, all of Iranian's crewed to
Speaker 4: take back to China ten fifteen years ago, are completely
Speaker 4: out of the Iran oil trading business because of concerns
Speaker 4: about US sanctions. And just to bring this back to
Speaker 4: the teapots, you know, the reason why they are buying
Speaker 4: and the national oil companies China's national oil companies aren't
Speaker 4: is because the teapots are more risk tolerant. And what
Speaker 4: I mean by that is that the national oil companies
Speaker 4: have a vested interest in maintaining access to the US
Speaker 4: dollar financial system. You know, these are global companies with
Speaker 4: global operations. They don't want to lose that access. Whereas
Speaker 4: if you look at the teapots who are still buying
Speaker 4: Iranian crude today, I suspect that they have little or no,
Speaker 4: you know, interest in maintaining access to the US dollar
Speaker 4: financial system. Sure, they'd prefer not to be sanctioned, but
Speaker 4: it sanctions being sanctioned wouldn't be catastrophic for them in
Speaker 4: the way it might be for Sinopack or China National
Speaker 4: Petroleum Corporation. And so it's this risk tolerance as well
Speaker 4: as this pursuit of discounted barrels that has made teapots
Speaker 4: the biggest importers of Iranian crude in China.
Speaker 3: So I don't mean to go on too big of
Speaker 3: a teapot tangent. How's that for alliteration? Thank you? But
Speaker 3: how did we end up with this situation where we
Speaker 3: have these national refining giants in China, which I assume
Speaker 3: you know, enjoy support from the state and they enjoy
Speaker 3: all the benefits of scale, and then you have these
Speaker 3: tiny or smaller refiners, independent refiners that have sort of
Speaker 3: cropped up. How did that system actually begin?
Speaker 4: Yeah, so sure, happy to provide some background. So the
Speaker 4: teapot refineries, which are actually called local refineries in China
Speaker 4: originated They grew up in China in northeastern China to
Speaker 4: process crude from the Shunli oil field, you know, which
Speaker 4: historically was one of China's backbone oil fields. And for
Speaker 4: most of their existence, you know, these teapots, you know,
Speaker 4: did not have the right to import and process imported crude.
Speaker 4: And this all changed back in twenty fifteen when the
Speaker 4: Chinese government you know, said that teapots who met certain
Speaker 4: requirements would be granted licenses to purchase and process imported crude.
Speaker 4: And the criteria that the teapots had to meet, you know,
Speaker 4: was were things such as, you know, sort of getting
Speaker 4: rid of highly polluting crude, distallation units, building natural gas storage,
Speaker 4: believe it or not. And so, you know, teapots that
Speaker 4: met these requirements could you know, apply for licenses, and
Speaker 4: they get a license, and they given a quota, and
Speaker 4: they could use that quota to purchase crude from outside
Speaker 4: of China's borders. And when I first started looking at
Speaker 4: the teapots, you know, around the time that they got
Speaker 4: the permission to import crude, they had a pretty diverse
Speaker 4: slate of suppliers. But as sanctions on countries such as Iran, Russia,
Speaker 4: you know, Venezuela titans and discounts were on offer to
Speaker 4: entice buyers to take these barrels that a lot of
Speaker 4: other importers were consuming, the teapot stepped into the void.
Speaker 2: This is already fascinating. I've already learned a lot from this.
Speaker 2: Do we have a sense of, like how big are
Speaker 2: these discounts? So intuitively, okay, a country gets sanctioned and
Speaker 2: then a bunch of buyers and that makes a lot
Speaker 2: of sense don't want to deal with it or don't
Speaker 2: want to risk getting sanctioned themselves. So when Iran, by
Speaker 2: dint of sanctions, essentially forced to sell a significant amount
Speaker 2: of or oil to these teapots, do we have a
Speaker 2: sense of, like what the pricing is on these deals
Speaker 2: relative to overall oil prices.
Speaker 4: So industry press will report, you know, the discounts available,
Speaker 4: which change over time, and the discounts are usually reported
Speaker 4: as you know, x number of dollars lower than the
Speaker 4: price of rent. So the discounts that China's teapot refineries
Speaker 4: receive on sanctioned barrels are certainly attractive enough to make
Speaker 4: them seek them out. Now, these discounts change over time,
Speaker 4: you know, they're often reported in industry press as you
Speaker 4: know a certain number of dollars you know, cheaper than
Speaker 4: the price of reent crude. And just to give you
Speaker 4: a sense of how important these are to the teapots,
Speaker 4: it Reiters ran a piece I believe back in twenty
Speaker 4: twenty three where they said they had calculated that China
Speaker 4: had saved ten billion dollars on crude oil imports by
Speaker 4: importing these sanction cruits.
Speaker 3: Okay, so you can imagine that in the current scenario
Speaker 3: where you have these teapot refineries that are benefiting from
Speaker 3: the discount between sanctioned and non sanction oil, they're going
Speaker 3: to be hit by I guess less oil in the
Speaker 3: system in general, but I mean Russia still exists, Russian
Speaker 3: oil is still out there. Could you see a scenario
Speaker 3: where they just start importing more Russian oil to offset
Speaker 3: some of the supply that's lost in the Middle East.
Speaker 4: Yeah, I do think that is likely. And I will
Speaker 4: say this is actually a tough time for the teapots
Speaker 4: because last month the Trump's removal of Venezuelan President Maduro
Speaker 4: from office and the US taking control of the marketing
Speaker 4: of some of Venezuela's crude sort of raise questions about
Speaker 4: how much oil, how much Venezuelan oil would China still
Speaker 4: be able to import and at what price, And in
Speaker 4: anticipation of a potential shortfall in the or Venezuelan oil imports,
Speaker 4: the teapots turned to Iran and specifically to purchasing rani
Speaker 4: and heavy crude, which is, you know, a decent substitute
Speaker 4: and you know, certainly could be obtained at a discount.
Speaker 4: But now, of course, you know, with the war in
Speaker 4: the Middle East, this is raising questions about the teapots
Speaker 4: supply of Iranian oil. The good news, I guess for
Speaker 4: China as a whole is that they are sitting on
Speaker 4: substantial strategic and commercial oil stockpiles that provide one hundred
Speaker 4: and twenty days of China's net crude oil imports at
Speaker 4: the twenty twenty five level. So you know what that
Speaker 4: means is that if all of you know, China was
Speaker 4: unable to import any oil at all, which obviously isn't
Speaker 4: going to happen, they could you know, rely on their
Speaker 4: stockpiles for four months of crude oil imports. And so
Speaker 4: if you look at the sort of Iranian crude and
Speaker 4: you know, perhaps other flows that might be disrupted by
Speaker 4: the closure of the Street of Hormos, you know, they're
Speaker 4: sitting in a pretty good position. Also, there is you
Speaker 4: know a good amount of Iranian and Russian crewed in
Speaker 4: floating storage in Asia off the coast of China and Malaysia.
Speaker 4: And you know this had been building up before the
Speaker 4: US and Israel launched their strikes on Iran. And there
Speaker 4: is also Iranian oil sitting in bonded storage in Chinese
Speaker 4: courts which could be tapped into.
Speaker 2: You know, you mentioned the significance of the you know,
Speaker 2: we're talking about the Iran China trading relationship. How significant
Speaker 2: was Venezuela in this picture? And what do we know
Speaker 2: about the picture now because I think there's still Venezuelan
Speaker 2: oil now going to China right now, But how well
Speaker 2: talk to us about the significance of that piece of
Speaker 2: the puzzle.
Speaker 4: Yeah, so Venezuela is a smaller crude oil supplier to
Speaker 4: China than Iran. Last year of Venezuela, you know, supplied
Speaker 4: you know, around four hundred thousand viarrels per day of
Speaker 4: crude oil to China. So you're just looking at you know,
Speaker 4: a few, very very small share the three four percent
Speaker 4: of China's total crude oil imports last year. However, you know,
Speaker 4: virtually all of that oil was going to the teapot refineries.
Speaker 4: So while you can say, oh, China is not going
Speaker 4: to be hit too hard, if you know, it loses
Speaker 4: four hundred thousand barrels per day of crude oil imports
Speaker 4: from Venezuela. It does sort of make life more difficult
Speaker 4: for the teapot refineries. Now, Secretary Right did say a
Speaker 4: couple of weeks ago that you know, the US had
Speaker 4: sold some Venezuelan crewe to China. I don't know who
Speaker 4: the buyers are. And of course for the teapots, you know,
Speaker 4: prices also an issue. I mean, yes, they would like
Speaker 4: to you know, continue to import those Venezuelan barrels because
Speaker 4: they're used to processing you know, that type of crude.
Speaker 4: But the current situation means that they might be even
Speaker 4: if they can still you know, buy a fair amount
Speaker 4: of Venezuela and oil you know that's being marketed by
Speaker 4: the US, you know, I think a big question for
Speaker 4: them is at what price?
Speaker 3: Can we go back to China's Strategic Petroleum Reserve for
Speaker 3: a second, because I feel like the US reserve was
Speaker 3: such a big talking point during the Biden administration and
Speaker 3: it kind of, you know, soared into our collective consciousness
Speaker 3: when we think about China's spr What are the actual
Speaker 3: goals there of the Chinese state? Why did they establish this,
Speaker 3: what are they thinking about? And then also what do
Speaker 3: we actually know about it?
Speaker 4: Yeah, so the main reason China established its strategic oil
Speaker 4: reserve is because China is a major importer of oil.
Speaker 4: China switched to a net importer of oil in nineteen
Speaker 4: ninety three, and as its reliance on imported crewed group
Speaker 4: there were real concerns about supply security in China, and
Speaker 4: so building a strategic petroleum reserve, you know, is one
Speaker 4: of the things that they did, you know, to make
Speaker 4: sure that they are in a good position, you know,
Speaker 4: to deal with unexpected disruptions to their oil supplies. Now,
Speaker 4: one thing, as I mentioned earlier, I've been looking at
Speaker 4: this issue for quite some time, and I recall you know,
Speaker 4: going back, you know, over twenty years ago. You know,
Speaker 4: so there we are discussions at China about do we
Speaker 4: need this, can we afford it? You know, how big
Speaker 4: a stockpile? You know, do we want to invest in building?
Speaker 4: And you know, as you may know, for states that
Speaker 4: are members of the International Energy Agency, at which China
Speaker 4: is not, but the International Energy Agency you know requires
Speaker 4: members still hold you know, stock piles you know equal
Speaker 4: to you know, ninety days of net oil import coverage,
Speaker 4: you know, and so that's the benchmark that has been
Speaker 4: used and a lot of Chinese discussions about its SPR
Speaker 4: over the years. And you know, again I remember, you know,
Speaker 4: going back fifteen twenty years ago, and you did have
Speaker 4: voices in China that were saying, we already import a
Speaker 4: lot of oil, Our imports are going to continue to grow.
Speaker 4: Can we really afford to build ninety days of net
Speaker 4: oil import coverage? But if you fast forward to today
Speaker 4: and you look at the different estimates out there about
Speaker 4: how much oil is sitting in storage in China, you know,
Speaker 4: to include both strategic stockpiles as well as commercial stock
Speaker 4: piles held by oil companies, China holds more than ninety
Speaker 4: days of net oil import coverage. And so looking at
Speaker 4: the disruptions, looking at the geopolitical sort of upheavals in
Speaker 4: oil markets, you know, just this calendar year with the
Speaker 4: US actions in venezuel and now Iran, the fact that
Speaker 4: China is sitting on these substantial stockpiles, you know, has
Speaker 4: to be a source of peace of mind and sort
Speaker 4: of a vindication for undertaking this project.
Speaker 2: Yeah, Tracy mentioned obviously all the fights about the SPR
Speaker 2: and the US under the Biden administration. And it's kind
Speaker 2: of weird because, like, you know, there's some question why
Speaker 2: is you know, the US is a massive exporter producer
Speaker 2: of oil now in a way that wasn't the case
Speaker 2: twenty years ago or thirty years ago or at the time,
Speaker 2: certainly at the time that the SPR was first conceived.
Speaker 2: So it's a little unclear what the point of an
Speaker 2: SPR is. And so I'm not surprised that it's sort
Speaker 2: of used to lower the price of gasoline for consumers
Speaker 2: in a time of high inflation and so forth. In China,
Speaker 2: where you know, the automobile, you know, they're switching rapidly
Speaker 2: to EVS. Oil is not going to be as important
Speaker 2: for that, and it's going to continue to be less
Speaker 2: important over time. How much is it about prosecuting war
Speaker 2: at some point and the prospect that they would completely
Speaker 2: get shut off from oil imports in the event of aggression,
Speaker 2: and how much is that really what it's about having
Speaker 2: the resources to fight a war if and when that
Speaker 2: time comes.
Speaker 4: Yeah, No, I absolutely think that is part of it.
Speaker 4: Ever since China switched to being a net importer of oil,
Speaker 4: there have been real concerns about the vulnerability of its
Speaker 4: oil imports and specifically its seaborne oil imports by various
Speaker 4: modern navies, notably that of the United States. That's why
Speaker 4: we saw China build these pipelines. Did they deliver oil
Speaker 4: overland from Russia and from Kazakhstan. And so given those concerns,
Speaker 4: given you know, those fears that in the event of
Speaker 4: a conflict that it's China, you know, in the United States,
Speaker 4: you know, against each other, would China, you know, would
Speaker 4: the United States be able to cut off the flow
Speaker 4: of oil to China. And just to put this even
Speaker 4: in sort of broader historical context, you know, if we
Speaker 4: go back to the nineteen sixties, at the time that
Speaker 4: the relationship between China and the Soviet Union was following
Speaker 4: was falling apart, at that point, China was heavily reliant
Speaker 4: on the Soviet Union for refined products needed to fuel
Speaker 4: its military jet fuel. And so as those tensions between
Speaker 4: China and the Soviet Union increased, the US's are did
Speaker 4: cut back on refined oil product exports to China, you know,
Speaker 4: so certainly, you know, there are examples, you know, looking
Speaker 4: sort of further back in time, they're basically, you know,
Speaker 4: the reason I'm sharing this bit of history with you
Speaker 4: is to let you know that China has first hand
Speaker 4: experience of being in you know, a tense relationship with
Speaker 4: another major power and having that major power you know,
Speaker 4: squeezed the country with respect to imported oil products.
Speaker 3: Actually, this might be a good time to ask just
Speaker 3: about China's foreign policy more broadly. So I saw, you know,
Speaker 3: they issued a statement following the attacks, and I read
Speaker 3: one person describe it as the kind of thing you
Speaker 3: would expect from Brussels, you know, very very generic, expressing
Speaker 3: concern over the situation in Iran, but they also expressed
Speaker 3: concern over the attacks on the UAE, for instance, which
Speaker 3: is of economic importance to China. Certainly, what's your sense
Speaker 3: of I guess what is at stake beyond just oil
Speaker 3: for China in this particular situation, you know, sort.
Speaker 4: Of looking beyond China's energy imports from the region. China
Speaker 4: national oil companies are big producers in a rock, so
Speaker 4: they have a number of upstream assets in that country.
Speaker 4: Chinese firms are also involved in building other types of
Speaker 4: infrastructure in the region. For example, there are Chinese companies
Speaker 4: that are building operating renewable energy facilities, especially solar farms
Speaker 4: in the region, and because of this, we've seen you know,
Speaker 4: Beijing call not just you know, for everyone to help
Speaker 4: ensure the free flow of energy from the region, but
Speaker 4: also to make sure that civilians aren't hit, right, because
Speaker 4: you have Chinese citizens on the ground there. It doesn't
Speaker 4: want any of its physical economic assets infrastructure in the
Speaker 4: region to get hit. So that's that, you know that
Speaker 4: the people on assets side of the story.
Speaker 3: Joe, I just remembered in Dubai kind of outside of
Speaker 3: like main Dubai, there was this small and it was
Speaker 3: called I think it was called Dragon Mark, and it
Speaker 3: was just a Chinese market. You would love it absolutely,
Speaker 3: like everything imaginable was available there, and like when you
Speaker 3: went there it felt very very surreal.
Speaker 2: Actually, yeah, I would love it. That sounds like the
Speaker 2: most interesting thing I've heard of in Dubai. Nothing else
Speaker 2: I've never nothing else about Dubai's ever made me.
Speaker 3: I can tell you more interesting things. So it's the
Speaker 3: North Korean restaurants and things like that.
Speaker 2: Oh I want I want to check out North Korean restaurant.
Speaker 3: Maybe you do and maybe you don't. I've been to
Speaker 3: oh really many years ago.
Speaker 2: Yeah, I've read about them I've read about like the
Speaker 2: chain of North very I mean it's just Korean.
Speaker 3: Food, right, I mean, well it's slightly it has its
Speaker 3: own twist. It's good food, not so great surveillance. That's
Speaker 3: how i'll or actually, maybe the surveillance is a little
Speaker 3: too good.
Speaker 2: Yeah, yeah, there we go. Good food excellent. That's like
Speaker 2: like a great Yelp reviews.
Speaker 3: Surveillance was great, the food, good food, excellen excellent.
Speaker 2: Stay for the face recognition, you know, I get the
Speaker 2: impression with just to stick on Chinese foreign policy for
Speaker 2: a second. One thing I hadn't realized up until recently.
Speaker 2: It just hadn't dawned on me, is like China doesn't
Speaker 2: have any like formal like treaty allies. You know, there's
Speaker 2: like nobody unlike the US, like we have an agreement
Speaker 2: we then you know, we're obligated or we agree to
Speaker 2: defend them. I don't think China does it that way.
Speaker 2: Like I was surprised, you know at the kind of
Speaker 2: Tracy mentioned that, the sort of neutralish tone. It's like
Speaker 2: telling Iran, like be careful in your retaliation and who
Speaker 2: you hit for obvious some of the reasons that you mentioned,
Speaker 2: you know, but it's certainly not like we're seeing China
Speaker 2: make any statement like we're gonna we're gonna up our
Speaker 2: shipments of weapons or defense weapons to Iran. Maybe they're
Speaker 2: doing some of that covertly, but they don't make a
Speaker 2: big announcement of it. But it strikes me like that's
Speaker 2: very telling that even a country with whom they have
Speaker 2: a fairly substantial economic partnership with and maybe some sort
Speaker 2: of ideological alignment in terms of countering Western hegemony and
Speaker 2: so forth, you know, still even with them, there's nothing
Speaker 2: formally established talk a little bit more about how they
Speaker 2: think strategically about the region beyond just the sort of
Speaker 2: commercial needs.
Speaker 4: Sure, so China wants to maintain good relations with Iran,
Speaker 4: and it also wants to maintain good relations with Saudi Arabia,
Speaker 4: uae Oman and other states in the region. And so
Speaker 4: China historically has you know, sort of walked this type rope,
Speaker 4: you know, in trying to balance relationships you know, the
Speaker 4: Saudias with the Iranians, and I think they have been
Speaker 4: pretty successful in pulling that off. Now, China has no
Speaker 4: interest in getting bogged down in a military conflict in
Speaker 4: the region. So we're not going to see China get
Speaker 4: involved in that. They are happy to be a mediator
Speaker 4: and in fact aging you know, recently announced i think
Speaker 4: just a few hours go that they are sending their
Speaker 4: special envoy to the region for mediation purposes. And so
Speaker 4: I think that China likes playing that role. I think
Speaker 4: it certainly bolsters their image as a sort of responsible
Speaker 4: outside power, that is, you know, getting involved in the region,
Speaker 4: you know, with the goal of restoring peace and stability.
Speaker 3: So one thing I wanted to make sure to ask
Speaker 3: you is just more broadly, you've spent your entire academic
Speaker 3: career studying Chinese energy markets and Chinese energy policy. What's
Speaker 3: the one thing you think people should know about that
Speaker 3: particular market or the one thing that makes China unusual
Speaker 3: in the grand scheme of global energy policies.
Speaker 4: So one thing I'd like to highlight is China's changing
Speaker 4: role in the global energy system. So, for most of
Speaker 4: the time that I've been following China's energy sector, it's
Speaker 4: been looking at China's role in global energy markets. It's
Speaker 4: been China as a growing importer of oil and natural gas,
Speaker 4: both pipeline gas and LNG, as an opportunistic whole importer.
Speaker 4: But there's an important change underway in China, which is
Speaker 4: that the country is transitioning to a lower carbon future.
Speaker 4: You may have seen a lot of news reports about
Speaker 4: record level of wind and solar capacity installations in China.
Speaker 4: Part of this is certainly about decarbonation, it's also about
Speaker 4: energy supply security. You know that I think one thing
Speaker 4: China has taken away from the war in Ukraine, from
Speaker 4: you know, US activities in Venezuela, you know, the current
Speaker 4: war in Iran, is that, you know, it's better just
Speaker 4: to be able to rely on energy sources within your
Speaker 4: own borders. There's an energy supply story as well. There's
Speaker 4: an energy security story for China. But the other thing
Speaker 4: that's going on here.
Speaker 5: Is that China wants to continue to be the supplier
Speaker 5: of the green technologies that the rest of the world
Speaker 5: needs for decarbonization, energy security, you know, access to reliable
Speaker 5: and affordable energy.
Speaker 4: So those three sets of goals, and so we are
Speaker 4: seeing China emerge as this green tech superpower, if you will.
Speaker 4: And so it's very interesting to think about this in
Speaker 4: China playing this role. You know, at the same time
Speaker 4: that the United States is advancing this agenda of energy dominance,
Speaker 4: which of course is focused on you know, expporting more
Speaker 4: US l G and oil and sort of using those
Speaker 4: as a source of leverage. When I think about that,
Speaker 4: my instinctive reaction is, you know, maybe more of course,
Speaker 4: it could be a chategor or stick, you know, but
Speaker 4: I think of it as being more of a stick,
Speaker 4: whereas I think that, you know, China has you know,
Speaker 4: something very different that it can offer that might be
Speaker 4: quite appealing to a lot of countries in the world.
Speaker 4: These a lot of countries don't want to spend a
Speaker 4: lot of their foreign exchange and energy imports. They don't
Speaker 4: want to be vulnerable to supply disruptions. And so if
Speaker 4: China's coming along and saying that, okay, you have you know,
Speaker 4: great solar energy resources, and you can buy solar panels
Speaker 4: for US, or you can hire you know, a Chinese
Speaker 4: EPC contract to build you you know, a solar farm,
Speaker 4: then you know, countries don't have to spend as much
Speaker 4: energy on foreign exchange. And just as one example, did
Speaker 4: a lot of work a number of years ago, like
Speaker 4: twenty eighteen, twenty nineteen, looking at why China was building
Speaker 4: so many coal fired power plants in Pakistan, when the
Speaker 4: country had you know, tremendous you know, renewable energy resource,
Speaker 4: you know, when the solar resources, especially especially solar, and
Speaker 4: I ended up doing this deep dive into Pakistan's energy sector.
Speaker 4: You know, one of the things I discovered is that
Speaker 4: they were spending a lot of you know, very precious
Speaker 4: foreign exchange on you know, importing fuel, oil, you know,
Speaker 4: and now coal to run these power plants. And that
Speaker 4: was an issue. And now we are seeing there have
Speaker 4: been a lot of reports over the past year about
Speaker 4: how you have individual households and businesses in Pakistan that
Speaker 4: have been buying a lot of Chinese solar panels to
Speaker 4: put on their roofs so that they have affordable and
Speaker 4: reliable energy. And so I just whenever I hear about
Speaker 4: the Pakistan example, I keep thinking back to that earlier
Speaker 4: research that I did and how you know, this to
Speaker 4: a certain extent has to be helping Pakistan concern foreign
Speaker 4: exchange or conserve for an exchange that it previously it
Speaker 4: would have spent on energy imports. I don't know the
Speaker 4: size of the savings off the top of my head,
Speaker 4: but that's just one example I wanted to highlight.
Speaker 2: Yeah, it does seem like you know, for most of
Speaker 2: recent history and still today, like fossil fuel dominance is
Speaker 2: incredibly important, and it's not like that's not going to
Speaker 2: change overnight. And so, yes, you have incredible fossil fuel
Speaker 2: capacity reserves in the US, Latin America, the Middle East,
Speaker 2: and so forth. But the longer term trend, as you
Speaker 2: spell it out, seems to be like at some point
Speaker 2: that much of the world just doesn't need as much
Speaker 2: of it, and their ability to reduce their energy bill
Speaker 2: will come from Chinese technology, whether we're talking about wind,
Speaker 2: solar or batteries that has been installed domestically and potentially
Speaker 2: reducing their bill. And so the payments that were at
Speaker 2: one point going to the US or going to the UAE,
Speaker 2: et cetera, switches to being payments for renewable technology from China. Yes, great,
Speaker 2: I summed up the uh I mean I can also.
Speaker 4: I mean the other sort of thing here is that
Speaker 4: I mean I think that you sort of you know,
Speaker 4: looking again at China, China's demand for diesel and gasoline
Speaker 4: has already peaked. In the case of diesel, a lot
Speaker 4: of that has to do with the property collapse, you know.
Speaker 4: With gasoline, it's been the rapid uptake of evs. And
Speaker 4: as a result of this very rapid uptake of evs,
Speaker 4: the International Energy Agency, some of China's national oil companies
Speaker 4: you know, have moved forward their date or when China's
Speaker 4: you know, overall oil demands is going to peak. Before
Speaker 4: I was seeing them, you know, years dates closer to
Speaker 4: twenty thirty now twenty twenty seven. At one point, Signupeck,
Speaker 4: one of the national oil companies, had even said, you know,
Speaker 4: twenty twenty five. And so as I mentioned, we have
Speaker 4: seen you know, demand for road transport fuel peak. But
Speaker 4: China will still need oil for petro chemicals, which in
Speaker 4: turn are used in some of these green technologies, right
Speaker 4: like we need petrochemicals, fees stocks as inputs for evs,
Speaker 4: for solar panels or withium ion batteries. So there is
Speaker 4: a link there and we will see, you know, China
Speaker 4: still needs to import some oil to continue to be
Speaker 4: a leader in manufacturing technologies.
Speaker 3: So I know you're not a macroeconomist, obviously, but when
Speaker 3: you look at what's happening now in Iran and the
Speaker 3: situation in the Middle East, what's your best guess for
Speaker 3: how this actually feeds into Chinese inflation and the broader
Speaker 3: I guess energy prices, like, how much could we actually
Speaker 3: see domestic energy prices in China go up as a
Speaker 3: result of curtailed supply, And how much of that curt
Speaker 3: tailed supply can just be offset from the reserve.
Speaker 4: Yeah, so we are seeing higher prices for energy. I
Speaker 4: know we've been talking a lot about oil, but I
Speaker 4: actually like to turn to l G to answer this question.
Speaker 4: So China imports almost one third of its ll G
Speaker 4: from the Middle East. Almost all of that comes from Cutter,
Speaker 4: with a little bit from the UAE and oman Uman
Speaker 4: obviously lies outside the street of Hormus. But if you
Speaker 4: look at the supplies coming you know, first and foremost
Speaker 4: from Cutter and that little bit you know from the UAE,
Speaker 4: those supplies are no longer flowing to China. And China
Speaker 4: doesn't have a massive strategic gas reserve, you know, the
Speaker 4: way it does with oil. And so the longer apply
Speaker 4: of LNG from from Cutter to China is disrupted, you know,
Speaker 4: the more China is going to be under pressure to
Speaker 4: cobble together a response. And I think in the very
Speaker 4: short term one of the big things, you know, that
Speaker 4: they can do is find ways to use less gas
Speaker 4: and hear sky high prices for spot cargos is going
Speaker 4: to help China do that, you know, And there has
Speaker 4: been reporting an industry press where a name with traders,
Speaker 4: you know, certainly at the big state owned companies, have
Speaker 4: been saying that, you know, we're not going to buy
Speaker 4: anything on the spot market right now because prices are
Speaker 4: just too hot.
Speaker 2: Do they frack in China? Have they got into the
Speaker 2: fracking revolution yet? Is that a thing over there?
Speaker 4: Yeah? They have. And actually last year, forty three percent
Speaker 4: of China's natural gas production came from unconventional sources. And
Speaker 4: the statistic is really of interest to me because I remember,
Speaker 4: you know, back when the US shale revolution was taking off,
Speaker 4: people would often note that on paper, China's shale resources
Speaker 4: were either you know, we're bigger than or you know,
Speaker 4: almost as big as the United States, like basically about
Speaker 4: I mean this is going back like fifteen sixteen years,
Speaker 4: but basically there were big China had big shale resources
Speaker 4: on paper. So I would often get the question, you know,
Speaker 4: are we going to see a shale revolution in China?
Speaker 4: My answer was, it's going to be more of a
Speaker 4: shale evolution because of different factors in the United States
Speaker 4: and China. Like in the United States, for example, people
Speaker 4: who were sitting above you know, promising shale resources could
Speaker 4: be compensated for that, not so much in China. You know,
Speaker 4: in the United States, you know, the shale revolution was
Speaker 4: really launched to buy these you know, small nimble companies
Speaker 4: need to maximize profit, Whereas in China, if you look
Speaker 4: at all the you know, upstream oil and gas assets,
Speaker 4: they're concentrated in the hands of China's nit and national
Speaker 4: oil companies, which are state owned, maybe not as nimble
Speaker 4: and certainly have you know, and so you know, so
Speaker 4: there are a number of different factors as they're just
Speaker 4: you know, two that I can which I'm actually I can.
Speaker 3: I'm really interested in this because if you think about
Speaker 3: China's large infrastructure projects and it's renewable build out, it
Speaker 3: feels like they basically are able to flip a switch
Speaker 3: and say like, we want to go big on this,
Speaker 3: and then they go big on this relatively quickly and
Speaker 3: probably faster than it usually happens in places like the States.
Speaker 3: But you're saying for this one thing, for fracking, that
Speaker 3: wasn't the case, which is very surprising to me.
Speaker 4: Yeah, it's been a much more gradual build up of
Speaker 4: unconventional gas production in China. And of course, you know
Speaker 4: when I say forty three percent of gas production, you
Speaker 4: know it's from unconventional sources. You know, that's also including
Speaker 4: things like like type gass. It's not all shale, although
Speaker 4: shale is absolutely part of the story. Yeah, and so
Speaker 4: to your point, yes, this was a much more gradual
Speaker 4: build up in unconventional gas production.
Speaker 2: Eric Adown's fascinating conversation. I learned a lot in that
Speaker 2: forty five minutes. Really appreciate you coming on to odd
Speaker 2: Lots and yeah, thanks for joining us. Thanks so much
Speaker 2: for having me, Tracy, that was a really interesting conversation.
Speaker 2: I didn't know that about the I mean, I guess
Speaker 2: I'm not surprised that there were small refineries, but that
Speaker 2: they served this very strategic focus of not having those
Speaker 2: international I guess liabilities, right.
Speaker 3: They don't have real system that they've built outside of
Speaker 3: I guess the more regulated official energy industry. It's and
Speaker 3: it's fascinating to me. A it's a good exercise in
Speaker 3: branding because I just find the teapot yeah so compelling.
Speaker 3: But also it's like an entire arbitrage industry.
Speaker 2: Right, yeah, yeah, no, it makes sense. Right, Like there's
Speaker 2: always gonna be someone sanctioned rights that seems like safe.
Speaker 2: There's always especially.
Speaker 3: Three certainties in life death taxes, and someone somewhere is
Speaker 3: going to have their oil sanction.
Speaker 2: That's absolutely true, and so yeah, but they're going to
Speaker 2: sell it, and they're going to sell it at a discount.
Speaker 2: And obviously any buyer of sanctioned commodities is going to
Speaker 2: be taking on some sort of risk that they're going
Speaker 2: to get slabbed with, like a secondary sanction or penalty
Speaker 2: and so forth. So it makes sense to have a
Speaker 2: sort of a you know, decentralized cottage industry. Cottage industry,
Speaker 2: it's another cute Sunday that it's not really cute. It's
Speaker 2: all very cute, it's all very cute. But yeah, this
Speaker 2: separate industry that does not have the same they're not
Speaker 2: exposed in some way.
Speaker 3: Yeah, and the other thing I was very interested to hear, obviously,
Speaker 3: the discussion around the strategic petroleum reserve was very interesting.
Speaker 3: This idea that you know, there might be foreign policy
Speaker 3: considerations behind building up that strategic supply. Also the idea
Speaker 3: that shale hasn't taken off as fast in China. Like again,
Speaker 3: that really surprises me. We're so used to hearing that
Speaker 3: one of the benefits of a command economy is that
Speaker 3: you can more of us, you know, direct this big stuff,
Speaker 3: and it doesn't seem to have happened in the case
Speaker 3: of shale. And again maybe that maybe that's more of
Speaker 3: a strategic decision I.
Speaker 2: Was going to say. I mean, what I would surmise
Speaker 2: and is just speculation, is like no, like the big
Speaker 2: priority is the priority is batteries, solar, wind and so forth.
Speaker 2: And I do think this is like going to be
Speaker 2: the big I don't know how long it take place,
Speaker 2: but the big shift that's already happening I guess under
Speaker 2: underway is this like a bunch of other countries that
Speaker 2: aren't the US and aren't China are going to want
Speaker 2: to reduce their energy import bill and they're going to
Speaker 2: swap it for an energy technology bill that they licensed
Speaker 2: from China. And that is a long term I.
Speaker 3: Think that's a really important point.
Speaker 2: It's a really important trend. And events like the war
Speaker 2: are in the short term going to raise China's importvill
Speaker 2: and others, and in the long term or the medium
Speaker 2: term encourage more countries to accelerate that transition. So that's
Speaker 2: a pretty big story.
Speaker 3: Pros and cons. Yes, if there's anyone out there who's
Speaker 3: working in Chinese hill or fracking, or has attempted to
Speaker 3: work in Chinese hill or fracking, I'd be very interested
Speaker 3: in talking to them.
Speaker 2: So I want to watch the Landman of China.
Speaker 3: I haven't watched the Landman America version, but I bet
Speaker 3: that would be interesting.
Speaker 2: You got to watch it, all right?
Speaker 3: Shall we leave it there?
Speaker 2: Let's leave it there.
Speaker 3: This has been another episode of the Odd Laws podcast.
Speaker 3: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 2: And I'm Jill wysan Thal. You can follow me at
Speaker 2: the Stalwart. Follow our guest Erica Downs. She's at Erica Downs.
Speaker 2: Follow our producers Carmen Rodriguez at Carmen Arman, dash Ob
Speaker 2: Bennett at dashbot In, kel Brooks at Keil Brooks and
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