China Loses Big In Israel-Iran Conflict

China’s increasing dependency on energy imports from across the Middle East, not just Iran, may make it one of the biggest losers in the conflict between Israel and Iran.

A few years ago, it seemed China’s position in the Middle East was secure. Beijing successfully brokered the normalization of relations between Saudi Arabia and Iran, creating the tantalizing possibility of a breakthrough peace deal and the diplomatic prestige long sought by China. The gargantuan scope of China’s demand for oil made it the region’s largest energy consumer by far, generating considerable theoretical leverage. Iran’s proxies and asymmetric networks gave a Chinese partner considerable influence and means to act. Concurrently, successive U.S. Presidents failed to influence local energy production while America’s domestic energy production climbed, further decreasing America’s interventionist incentives.

Well, it turns out such a position wasn’t as secure as Chairman Xi hoped. Hegemony is hard. China has discovered that one marginalizes geopolitics and regional rivalries at their peril. Regional flashpoints have now put China in an awkward position. China must balance competing mutually exclusive desires: regional peace to keep exports flowing, the aspirations of upstart geopolitical actors, an outward commitment to avoid military deployments, and the confidence in Beijing held by competing entities.

China’s Energy Demand

Xi Jinping considers Chinese energy security a key plank in his policy platform. In January this year, China unveiled its first nationwide energy law aiming to synchronize disparate local policies as a part of Xi’s energy agenda. This obsession with energy is why China is so invested in many energy-adjacent projects from critical minerals and electric vehicles to nuclear reactors. Energy is seen both as a developmental tool and an area where China can surpass Western competitors and as a national security priority.

Under Xi’s assessment, Chinese energy imports constitute a national weakness, and as such need to be marginalized to reduce vulnerabilities that arise on foreign dependency. For example, China imports roughly three-quarters of its crude oil from overseas, with over 43% of the crude oil that China does import coming from the Middle East. Most of that oil must be imported through a tiny strait vulnerable to being cut off by naval power which is beyond China’s ability to project military power. China calls this its “Malacca Dilemma.” It has long inspired China’s push for domestic energy development and international initiatives such as parts of the Belt and Road Initiative.

While China is genuinely embracing future and alternative energy sources while attempting to move past hydrocarbons, such an undertaking is easier said than done. Sustained investments in alternative forms of energy production are pricey and take time to yield results – Middle Eastern energy is comparatively cheap. While they come online, China is forced to deepen its dependency and increase imports due to the energy and capital-intensive nature of new energy investment. Even if there was a total unwavering commitment to moving past hydrocarbons inside China, the logistics of phasing billions off them is daunting.

Time is also a key obstacle for China that incentives its suppliers to act aggressively. Chinese moves are transparent and suppliers to China know that China’s serious long-term goal is their own marginalization. The size and scale of the Chinese economy, its consumer base, and its energy investments means that it’s very likely to set the tenor of the global energy transformation, compared with rhetoric but lagging action from the West. So, why wouldn’t suppliers of Chinese energy act regardless of overall export conditions if they think it can force Beijing into supporting them now while in the future support cannot be relied upon?

China’s Troubled Energy Sources

China’s overwhelming dependency on Middle Eastern energy from many sources make it vulnerable to regional shocks. The ongoing Israeli Iranian conflict is only the latest in a string of Middle Eastern crises sub optimally managed by Beijing. The October 7th attacks by Hamas, a proxy of Iran, succeeded in their strategic objective of derailing the Abraham Accords, the initiative to normalize relations between Israel and Arab-majority states such as Saudi Arabia. It was the first large broach in Saudi Iranian relations since normalization and the impact of the act and the subsequent scuttling of the accords on their shared Chinese partner appears to have been a marginal calculation.

The subsequent Red Sea Crisis which was kicked off by Iranian-backed Houthis based in Yemen impacted global commodity stability, including in China, and was a testament to both regional instability and China’s lack of control over its competing oil suppliers. While Houthis didn’t target Chinese or Russian flagged vessels, the crisis still stymied trade to China’s detriment.

At the core of the problem is the Saudi Iranian rivalry. Should China take decisive action and defend Iran, which militarily it is probably too late to do anyway, then China alienates Saudi Arabia and many gulf suppliers. This is why even before the conflict, the alleged purchase of materials by Iran to make over 800 ballistic missiles from China set off alarms in the region, and not just in Israel. China also has to keep the Straits of Hormuz open in the event of conflict, a significant structural divergence from Iran’s military incentives. If China chose to do nothing on Iran’s benefit, Israeli strikes will continue to degrade Iranian export capacity, and Chinese partners outside the region such as Pakistan and Russia (whom have both expressed support for Iran) are likely to take a dim view and remember what Chinese commitment under pressure looks like.

The energy tightrope that helped China through the supply shocks of the beginning of the war in Ukraine and subsequent global inflation appears to no longer be navigable. While China’s foreign ministry is by all indicators feverishly searching for some sort of deal, any ceasefire and return to exports as usual is far removed. China now has to make hard choices. Will it become more involved politically and militarily in the Middle East in defense of its economic incentives? Will it value Iran’s political and military utility over Saudi Arabia’s and other gulf energy exporters’ sheer hydrocarbon reserves? Is China willing to risk relations elsewhere to bail out its Middle Eastern policy, or will it re prioritize? Ultimately these answers will shape much of the next few decades of the global energy market and international geoeconomics, and only Xi can answer them.