If Iran's oil is cut off, China will pay the price

Israel hasn't attacked Iran's energy export hubs so far. If it does, China could find itself cut off from a flow of cheap oil.
Iran exports around 1.7 million barrels of crude a day, less than 2% of global demand. The U.S. reimposed sanctions on Tehran's oil exports in late 2018, a few months after President Trump withdrew from the Iran nuclear deal during his first term.
Most countries won't touch Iran's sanctioned crude, so Tehran is forced to sell at a discount and find covert ways to get it onto the market. It uses a 'dark fleet" of tankers that sail with their transponders turned off to ship cargoes of oil.
More than 90% of Iran's oil exports now go to China, according to commodities data company Kpler. Most of it is bought by small Chinese 'teapot" refineries clustered in the Shandong region that operate independently from state-owned oil companies. They switched to illicit Iranian oil en masse in 2022 to protect their margins.
The discount on Iran's oil compared with a similar grade of non-sanctioned crude such as Oman Export Blend is currently around $2 a barrel, according to Tom Reed, vice president of China crude at commodity data provider Argus Media. The gap has narrowed recently because of worries that conflict with Israel and stricter enforcement of U.S. sanctions could disrupt Iranian supply. The discount has been wider in the past, averaging $11 in 2023 and $4 in 2024.
With few alternative buyers for Iranian oil, Chinese refineries have leverage. Last year, an official from Iran's Chamber of Commerce characterized the trading relationship as 'a colonial trap." As the sanctioned oil is paid for in renminbi rather than in dollars, Iran has few choices about where to spend its crude earnings except on Chinese goods, reinforcing its dependency on one country.
If Israel's goal is to seek regime change in Iran, it may feel tempted to cut off Tehran's oil funds. A strike on Kharg Island in the Persian Gulf, where most of Iran's tankers set sail from, would stop the bulk of the country's oil exports.
This would shock oil markets and could alienate the White House. Trump doesn't want to see Americans paying higher gasoline prices at the pump. But the Organization of the Petroleum Exporting Countries Plus group of producers has a lot of spare capacity that could be returned to the market relatively quickly.
Saudi Arabia and the United Arab Emirates combined have more than four million barrels of oil a day on the sidelines. A Goldman Sachs analysis found that these two producers replaced around 80% of lost barrels within around six months in previous supply shocks.
This safety valve could ease tensions in the oil market if needed. But Iran's top customer would still feel the pinch if its energy exports are disrupted. For the first time in years, China's private refineries would have to pay full price for a barrel of oil.
Write to Carol Ryan at carol.ryan@wsj.com

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