Recent attacks on Saudi Arabia's petroleum facilities have raised pressure on China to face the problem of its rising dependence on foreign oil.
In the aftermath of the Sept. 14 strikes that reduced world supplies by 5.7 million barrels per day, prices have largely subsided from initial spikes of nearly 20 percent on assurances from the International Energy Agency (IEA) that "markets are well supplied with ample commercial stocks" of oil.
Last week, the Paris-based IEA calmed markets again with a statement that its member countries have 1.55 billion barrels of emergency oil reserves on hand, which is "more than enough to offset to offset any significant disruption in supplies for an extended period of time."
President Donald Trump has also given assurance that the United States stands ready to tap into the U.S. Strategic Petroleum Reserve (SPR) if necessary.
But the threat of further disruptions in Middle East oil supplies could be especially troubling for China, which is vulnerable both to energy security risks and to the effects of higher import costs on its economy.
The attacks have added to worries that have been building since May when two Saudi tankers suffered damage from attacks near the Strait of Hormuz on approaches to the Persian Gulf.
The incidents have raised worldwide risks that the Saudi conflict with Iran-backed Houthi rebels in Yemen could widen.
The latest developments may fall disproportionately on China which now relies on imports for over 70 percent of its crude oil supplies.
China gets about 4.5 million barrels per day (mbpd) from the Persian Gulf out of the 10 mbpd that it imports, according to Mikkal Herberg, energy security research director for the Seattle-based National Bureau of Asian Research.
Russia and Saudi Arabia have been competing for the top spot among China's oil suppliers for years, Platts Commodity News reported this month.
While Russia has taken first place over the past three years, Saudi Arabia displaced it in the first seven months of 2019 as supplies climbed 46.7 percent to 1.55 mbpd, Platts said.
"The dominance of Saudi crude also means that China is more exposed to the geopolitical risks of the Middle East," said the report, just four days before the drone strikes sidelined about half of Saudi output.
China's heavy reliance on Saudi exports could send it scrambling into the market to make up the shortfall, helping to drive prices higher. China is already the world's biggest importer of crude.
In a commentary, Bloomberg News noted that the attack resulted in the "single-worst disruption in oil markets ever," even greater than the loss of output in 1990 following Iraq's invasion of Kuwait.
Given that comparison, the market has appeared relatively restrained. But for China, market conditions are very different from 2014, the last year when oil prices rose above U.S. $100 per barrel.
The success of U.S. shale and tight oil development has added to global supplies, while the Saudi-led "Opec+" (OpecPlus) deal has struggled to cut output and keep participating producers including Russia in line.
China's economic growth has been dropping as it tries to cope with its own "headwinds" and the effects of the trade war with the United States.
The country's foreign exchange reserves have fallen 22 percent from their 2014 highs. China may no longer be able to afford its policy of continuing to increase oil imports, whatever the cost.
The attacks on the Saudi oil industry threaten to weigh down China's economy with an additional burden at a time of rising import dependence and slowing industrial growth.
Two days after the bombing, China's National Bureau of Statistics announced that year-on-year growth in industrial production fell 4.4 percent in August from 4.8 percent in July, staging the weakest performance in over 17 years.
China's domestic oil production, which has stagnated for years, edged up 1 percent in August to 3.8 mbpd, while Imports climbed 9.9 percent to 9.97 mbpd.
Derek Scissors, an Asia economist and resident scholar at the American Enterprise Institute in Washington, said that higher oil prices may pressure China's economy over time.
"It's not a matter of how high, but how long," Scissors said.
"I don't think oil prices will stay high," he said. "If they do, it's another blow to the fragile balance of payments in the form of a smaller trade surplus."
"It adds to U.S. trade pressure on that score. On the domestic side, sustained higher oil prices will raise producer costs and sound the stagflation alarm," Scissors said.
'Equity oil' investments
While the outcome of the Saudi crisis for China remains uncertain, the government has had nearly two decades to prepare.
The warning signs of China's excessive import dependence have been flashing since at least 2008, when reliance on foreign oil for consumption first reached 50 percent.
The country has diversified sources and invested in "equity oil" around the globe, but it remains heavily dependent on strategic choke points on maritime routes.
Under IEA prodding, China's government took its first steps toward building the country's own SPR to cushion against sudden shocks like the current disruption, but the process only started in 2001.
Progress was slowed by debates over the cost to the country's national oil companies, the potential use of reserves to influence prices and mixing with commercial stocks. Over the years, the government has withheld information about when it is filling its SPR and when it is not.
To this day, China's SPR policy lacks the transparency of its western counterparts to stabilize markets in case of emergencies.
Official reports on the SPR are rare and details are sketchy. In January 2018, for example, the NBS reported the level of the "national crude oil reserves" and "some corporate facilities," but only as of the end of June 2017.
Despite such efforts, the government's import predicament is poised to get worse. In studies last year, the IEA projected that China's import dependence will reach 76 percent in 2024 and hit 82 percent in 2040.
It is unclear whether the threats to Saudi oil supplies will lead to any changes in China's energy security responses, market regulation, pricing policies or oil demand.
But the combination of supply risks with economic weakening and the trade war makes this crisis qualitatively different for the government, which is facing challenges on all three fronts at once.
The option of inaction on energy policy may only increase economic pressures, if another attack pushes oil prices higher again.
'The biggest victim'
China's reaction to the oil risk has been divided.
Last week, the Communist Party-affiliated Global Times quoted analysts as saying that the impact on China would be limited. The country's SPR capacity is expected to reach 85 million tons (623 million barrels) by 2020, "roughly equivalent to 90 days of oil consumption," the paper said, citing "media reports."
While the 90-day figure is an overstatement, based on current consumption of 10 mbpd, the estimate also relies on a 2020 target for capacity rather than data on how much oil is in the SPR now. In January 2018, the NBS reported the reserve level as 37.7 million tons (276 million barrels) as of mid- 2017.
A report in the official English-language China Daily voiced greater concern.
"China, which is heavily reliant on imported oil, will be the biggest victim of the attacks on the oil facility in Saudi Arabia," said Lin Boqiang, director of Xiamen University's China Center for Energy Economics Research, according to the paper.
"We need to pay more attention to energy security, especially as the situation in the Middle East is fairly fragile," said Lin.
"We need to be well-prepared in terms of oil reserves and find alternatives to reduce external reliance, such as encouraging people to take public transportation and purchase electric vehicles," he said.
On Friday, an official from the National Energy Administration (NEA) estimated that China has enough oil to last "about 80 days," Reuters reported, or nearly as much as the IEA standard of 90 days of import coverage for its member countries.
But the official gave no precise figure in barrels and the estimate referred to all oil on hand, including China's SPR, oil storage at companies and commercial stocks, Reuters said.
In the meantime, rising imports of natural gas suggest that China may be repeating the pattern of energy security risks that it is already running with oil.
According to official data for the eight months through August, gas imports have increased 10.3 percent this year while production has grown 9.3 percent. Domestic gas output covered 44.5 percent of consumption last year.