Hormuz and China’s Energy Advantage

The closure of the Strait of Hormuz following the outbreak of war between the U.S. and Iran has disrupted about a fifth of the world’s oil and liquefied natural gas flows, driving up energy costs around the world. Yet China, the world’s largest energy consumer and oil importer, has so far weathered the disruption with relatively little economic impact. Strategic stockpiles, alternative fossil fuel supplies, and domestic energy resources have all contributed to China’s resilience, while clean energy and electrification have played a more limited role.

Scott Moore, a faculty fellow with the Kleinman Center and Director of China Programs and Strategic Initiatives at the University of Pennsylvania, discusses what the Hormuz crisis reveals about China’s energy strategy and its position as the world’s dominant clean-energy manufacturer. He also explores how the crisis could accelerate global demand for renewable energy and electric vehicles, and argues that the United States needs a new approach to Chinese clean-energy technologies if it hopes to compete in a future in which critical energy supply chains are increasingly concentrated in China.

Full Transcript

Andy Stone: Welcome to the Energy Policy Now podcast from the Kleinman Center for Energy Policy at the University of Pennsylvania. I’m Andy Stone.

The outbreak of war between the U.S. and Iran in February led to the largest disruption in global oil supplies in history. The closure of the Strait of Hormuz that followed has affected about a fifth of the world’s oil and liquefied natural gas flows, leading to higher energy costs across much of the world and hardship for consumers and industry. Yet the impact on China, the world’s largest energy consumer and its largest oil importer, has been relatively muted. Through a combination of strategic stockpiling and domestic and alternative fossil fuel supplies, China has so far avoided major economic disruption.

Clean energy has also played a role, though perhaps a smaller one than China’s reputation as a clean energy powerhouse might suggest. Nevertheless, as today’s guest will argue, the war with Iran may ultimately play to China’s longer term strengths as it accelerates the rate at which countries turn to the renewable energy and EV technologies that Chinese companies dominate.

My guest is Scott Moore, a faculty fellow with the Kleinman Center and director of China programs and strategic initiatives at the University of Pennsylvania. In a recent Brookings article, Scott explores what the Hormuz closure reveals about China’s energy strategy. And he argues that while the U.S. and China both remain reliant on fossil fuels, the U.S. now needs a coherent clean tech policy, perhaps one that borrows a page from recent Chinese trade policy, if it hopes to navigate a future in which critical energy supply chains are concentrated in China. Scott, welcome back to the podcast.

Scott Moore: Thanks so much, Andy. It’s great to be back with you.

Stone: So a year ago, you were on this podcast talking about a similar topic. We talked about China, U.S. competition in the energy sector. That was a bit of a broad discussion. And today, we’re back talking about it within the context of Hormuz.

Moore: Exactly. That happened, along with plenty of other things over the last year. But yeah, Andy, I think actually our last conversation really is what brings me here, ultimately, in that as we talked about in that conversation, we were starting to see a real kind of difference between where the energy policy of the United States, the transition to the second Trump administration, versus that of China, was headed. And as you said, we had a pretty wide-ranging conversation about what the potential implications might be. And particularly this administration’s de-emphasis on clean energy and renewables in favor of fossil fuels.

So the biggest thing to happen by far in the energy landscape over the past year was the current conflict and ongoing conflict in the Middle East Persian Gulf. And specifically, the virtually complete closure of the Strait of Hormuz by Iran, which as we now know, interrupted a big fraction of exports of both oil and natural gas and had a very wide-ranging effect on the global economy.

And so thinking about the sheer size of that shock, what I refer to in the piece as the Hormuz shock or the Hormuz crisis, that’s a really interesting natural experiment to kind of go back and test what we were talking about a year ago, in terms of, so what does this difference in energy policy between the U.S. and China really mean? What does it mean when you have an energy policy that relies much more heavily on fossil fuels versus one that has a bigger role, relatively speaking, for clean energy and renewables? How did that difference play out in this shock and this sort of forced experiment, if you want to think of it that way?

Stone: In the Brookings paper, you point out that Iran was a major supplier of oil to China prior to the closure of Hormuz. And actually China, I think you said, imported about 80% of the Iranian oil exports. So quite a big connection there. So I’m going to ask you just to start generally based upon what you just said. Obviously, it would seem that China has a vulnerability there because of its dependence to some degree on the oil through the Hormuz and specifically from Iran. But what has the disruption of the flow on oil actually been on China to date?

Moore: That’s a really important thing to start with, that the impact of the Hormuz shock on China has been very muted, much more muted than on a lot of other emerging economies that are much more dependent on imported oil and gas than is China. Now China is by far the world’s largest oil importer and natural gas importer. So it is highly dependent on these imports.

But—and here’s where the sort of interesting part comes in—China’s pursued a very deliberate multi-pronged strategy over quite a long period of time, really about the last 20 years or so, to reduce the effect of exactly this kind of shock. And a lot that itself, that determination, has several causes. But one of which was just the sheer realization that it is so dependent on imports, particularly of especially oil, but also natural gas from this particular Persian Gulf region. As you pointed out, Iran is a major supplier of Chinese oil.

And that dependence had been concerning, both for economic reasons—China is very concerned about being exposed to higher fuel prices in the event of exactly this type of scenario or anything else which might close the Strait of Hormuz—as well as just sheer security factors. China has been concerned for quite a while about the possibility that the U.S. Navy or U.S. allies and partners may be able to cut off the flow of both oil, gas and other imports from the Persian Gulf and Indian Ocean region over into China’s territorial waters.

So this is something that’s been of great concern to China for quite a while. And it’s been trying to tackle that for three main things, which I’ll just say briefly. And we can certainly talk more about them. But number one, stockpiling, which you mentioned. And China really ramped up its imports of oil in the months prior to the Hormuz crisis. Number two, increasing flows from other suppliers, including overland, especially from Russia. So instead of relying on seaborn fuel imports, it’s importing a lot more overland via pipelines, especially from Russia. And then third, pursuing this “all of the above” energy strategy, which you and I talked about last time, that includes a bigger role for renewables and, crucially, for thinking about displacing oil, electric vehicles, which can be powered by renewable and clean energy sources.

Stone: Yeah. I mean, you really made a distinction between, you’ve got the transportation sector and you’ve got the power sector. The electricity generation sector. And those are dependent on different fuel resources, as you just started to explain, and they have different vulnerabilities as well.

Moore: Yes, that’s right. And definitely important to clarify upfront that when you talk about oil, you’re really talking about that as an impact, in terms of the actual oil itself, on the transport sector. That’s really where oil consumption hurts. Although there is an important petrochemical feedstock industry, everything from fertilizers to plastics, that depends on petrochemical inputs associated with oil production. For China, that same role is played by coal.

Stone: So coal is over 50% of China’s electricity generation, right, in renewables?

Moore: Yes.

Stone: It’s almost a quarter, if I recall correctly.

Moore: Almost a quarter, which is up from nothing 25 years ago. So it’s a huge rate of increase. But yeah, in relative terms, still not as great as coal. Coal is really the kind of foundation of China’s power sector, whereas in the U.S. it’s gas.

Stone: One of the basic premises of the article is that China has been depicted as, or it’s been called in some quarters, a “electro state”. I think maybe that dependence on electricity and clean electricity and the electrification of its economy has maybe, in passing, been credited with some of its ability to weather the current storm. You argue against that in the paper. And you argue that it is not an electro state, at least in terms of the electrification’s significance in again, getting through the current crisis. Tell us a little bit more about that framing and how you see it really playing out.

Moore: That’s right, Andy. And in terms of going back to this difference between the U.S. and China that I really started with for this paper, one way to put that into a slogan is this electro state versus petro state idea. And really, what those terms mean is the idea that China may be the first big economy to move to an energy system where, theoretically, you don’t really need liquid fuels, especially fossil fuels. And a big part of that is electrification of the transport sector. So replacing most internal combustion engine vehicles with electric vehicles. That’s sort of what the electro state concept means. And then also phasing out liquid fuels for most other energy uses.

That is very much in process, if it ever kind of gets to that point. But I think you can make a pretty good argument that China’s way ahead of where the U.S. is in terms of the percentage of EV penetration, at least in passenger cars and things like that. So that’s kind of what that concept means.

In terms of how that’s translated to the Hormuz shock, I don’t think that electrification piece has really played much of a role in limiting China’s exposure to the Hormuz crisis. I say in the piece, I think the two much bigger factors are, number one, that strategic stockpiling of oil, which meant that China could actually sharply cut its imports of oil after the Strait of Hormuz was closed, and thereby actually limit the price shock to the rest of the world. The price shock would have been far more severe had China not reduced those imports so dramatically. That’s just stemming from how large an oil importer China is.

But then the second factor, again, is that increased import overland, especially from Russia, that allowed China to not have to depend on Hormuz and the Persian Gulf region for exports. Which, I might add, is very much not the case for a lot of other large emerging economies. You know, India is very dependent on seaborn oil imports from the Persian Gulf, for example. So China is in a favorable position in that respect.

Stone: So geographically, being located next to Russia is a big factor.

Moore: Yeah, exactly. And having those pipelines, those overland pipelines that allow China to not have to be dependent on the seaborn exports.

Stone: You know, one of the interesting aspects here I just want to jump into for one moment, is the extent to which China actually has reserves of oil. And it’s interesting because as you mentioned earlier, in the lead up to the beginning of the conflict in February, China had obviously seen this coming and they accelerated the rate of oil imports. And then right after the conflict begins, they cut, I guess, their seaborn imports, at least. And then the country starts relying upon oil reserves, which—the extent of which seemed to be somewhat secret.

Moore: Yeah, that’s true. And first of all, yeah, a key thing about China is that it has probably the world’s largest strategic stockpile of oil. And when I say probably, that reveals an interesting difference, though. The U.S. has something called the Strategic Petroleum Reserve, which is owned and operated by the U.S. federal government, the Department of Energy. So it’s a government-run stockpile. Whereas China’s strategic reserves are split between a government-run and administered reserve, but more significant commercial reserves that are owned and operated by state owned enterprises. Oil and gas companies. And so they effectively operate at the direction of the state for most intents and purposes, but they’re not actually government administered in the way that the U.S. Strategic Petroleum Reserve is. And because of that difference in ownership and administration, it’s not as clear what the actual size of the stockpiles are.

But that being said, those stockpiles are enormous, and that was a huge buffering mechanism. And what China did is really expand those stockpiles in the eight to 10 months before Hormuz. And there were several reasons why China built up its reserves in that period. But foreshadowing of this eventual conflict was part of it. If you recall, there was the US-Israel strike on Iran’s nuclear facilities that occurred in 2025. So there were there were sort of warnings that volatility in the region could increase. And that, I think it’s fair to say, played a role in that increase in stockpiling and imports before the closure of Hormuz, which was really the trigger.

It’s maybe worth emphasizing that while the US-Iran conflict intention has been building for some time, the price shock really only came with the closure of the Strait of Hormuz, because it’s so important for the flow of oil and gas out of this region.

Stone: In part, you, in the paper have countered the perception that renewable energy and EVs were a savior to China in this crisis. I would imagine that they reduced demand for fossil fuels more than just marginally, probably relatively significantly, but there’s still a big market to serve. But then you go on to the next thought. And this gets to the relationship with the United States. And you point out that although China, in the moment, just like the United States, remains highly dependent upon fossil fuels, it is simultaneously and has been for quite some time building its capability in clean energy, which is no secret to anybody at this point. That is playing into the situation as well. The world is looking to get away from some of that volatility of the fossil fuel markets. And this is just playing right into China’s hands. Talk about that, please.

Moore: The takeaway from all this is that short term, both a China approach and a U.S. approach can work in limiting the impact of this type of crisis and shock. But longer term, what I think is shaping up is a sustained increase in demand for clean technology, for alternatives to liquid fossil fuels, especially oil. What people sometimes call demand destruction of oil, meaning a permanent reduction in demand. That’s what I think is shaping up.

And the problem there is, while China is essentially positioned to do well no matter what the energy mix ends up being, whether it’s more fossil or more clean tech, but the U.S. is at a huge disadvantage if that path continues, as I think it will. And essentially, what the Hormuz shock and crisis does is accelerate the energy transition, especially in in certain markets that were heavily exposed to Hormuz.

So it’s, again, especially electric vehicles. But also batteries, solar panels in particular, that we see in spikes in demand for after the onset of this crisis and shock. And that’s really, I think, the thing to be concerned about from a U.S. policy perspective, is the relative position of the U.S. economy and U.S. manufacturers is so disadvantaged relative to that of China that the U.S. is not really going to be able to gain any of the value from that faster energy transition toward clean technology. Whereas China is sort of effectively positioned to grab a fair amount of what remains of the fossil economy, as well as a fair amount of what we see shaping up to be the clean tech economy.

Stone: So Scott, I just want to bring up the argument that the U.S. administration has made for its focus on fossil fuel and the expansion of domestic fossil fuel production. And that is a strategic inherent advantage of the United States because those resources exist under the ground here. Those resources can be produced at relatively low cost. And that provides the United States potentially an industrial advantage in terms of lower cost of production, lower cost of exports vis-a-vis other countries in the world. I want to get your thoughts on that. That’s not an energy industry specific argument, but it is an argument.

Moore: Yeah. And I mean, frankly, I think it does have some truth to it. I think what I would say is it kind of becomes short versus long run, though. In the short run, it’s true. And in fact, I mean, the U.S. and China have both been, relatively speaking, spared from the worst effects of the Hormuz shock for different reasons. Again, China because of its stockpiling, primarily, and the U.S. because we do have a lot of domestic production and refining capacity. That’s kept energy prices and the energy price increases quite a bit lower than they would be and that they have been for other countries. Though if you ask, you know, most drivers in the U.S., they’d still say gas prices are way too high. But relatively speaking, the effect has been somewhat limited.

But it’s, again, a kind of short versus long run thing. What we’re seeing from the initial data at least—and it is, you know, preliminary. But we see these spikes in demand for clean energy. I think there’s good reason to think that’s probably going to continue, which means that over time, the demand for the fossil energy that the U.S. is producing is going to decrease.

So you can try to have a larger share of a contracting market. But in my view, that’s not—and I think most people would agree, that’s not the optimum position to be in. You want to gain a larger share of a growing market. That would be far preferable. And that’s why it’s a concern that the U.S. is so far behind in clean energy.

Stone: But you mentioned also a few minutes ago that some of the countries that import clean technology from China—and in the paper here you talk about Thailand and the Philippines. I think you mentioned them a little bit earlier. You’ve got some pretty dramatic data here showing how much their imports of Chinese clean technology has increased over the last year. Something like about 50% increase in EV exports to—I think we’ve got Thailand and the Philippines. How much of that can really be correlated to the Hormuz crisis and the pressures that it’s created and how much might be some other route?

Moore: I think the fairest answer is a pretty big chunk of it. And that’s based on both the timing as well as the geography. As you mentioned, a lot of the most dramatic spikes in imports and demand have also been from the countries that were hardest hit by the Hormuz shock and crisis. So it would be quite a coincidence if those things happened and it had nothing to do with Hormuz.

That’s also, by the way, the opinion of most analysts. I quote a few of them in the piece, to attribute those demand spikes and import spikes to the Hormuz crisis in particular. But that being said, you know, it is important to know it’s probably not all of what you’re seeing. There were some changes in tariff rates and subsidy provisions during this period that probably also affected imports as well. So you can’t say it’s all the Hormuz shock. But I think there’s a pretty good base of evidence to suggest that a big chunk and probably most of it is.

Stone: Let’s take a step back three years in time to the Biden administration, which had tried, through the Inflation Reduction Act, to build more domestic clean energy manufacturing and reduce U.S. dependence on Chinese clean energy supply chains. Given the enormous lead that China does enjoy in areas like solar batteries and EVs, in your view, was that strategy under the prior administration realistic?

Moore: I think it was worth trying. And I mean, I think the fact that the IRA did gain, you know, a fair amount of bipartisan support was a good illustration that it was certainly an approach worth trying. That being said, at the time, I was kind of critical of it because of the sheer cost of trying to counter China. What was even at that point, you know, really hard to compete with, scale advantages from Chinese clean tech manufacturers. I think the sheer cost was hard to justify in a lot of ways.

I think now in our current situation, there are three things we could do. And I talk about them in the piece. First of all, to increase funding, especially for commercial demonstration and deployment, and just sort of the post-basic research phases for kind of next generation and advanced clean energy technologies. Things like fusion, enhanced geothermal. Different stages of development. Enhanced geothermal, for example, doesn’t require a ton of additional basic research, but it’s still pre-commercial. And basically, I think we need more public support to help those technologies get across the valley of death.

Stone: Technologies, areas where the U.S. actually has strategic advantage in the technologies themselves?

Moore: That’s exactly—I would argue yes. And I think enhanced geothermal is the best example of that, because this is a technology that largely relies on know-how and infrastructure from unconventional oil and gas drilling. From fracking in particular. It’s very similar technology and processes. So we have, to an approximation, the infrastructure, the know-how, the workforce to deploy this technology at a greater scale.

Now, I will say enhanced geothermal is unfortunately not going to power the country. But certainly in regions where the geology is favorable and things like that, it can be an important part of the energy mix. So I think it’s an exciting technology that ticks those boxes of being essentially fossil free, but also having some strong U.S. competitive advantages.

I also, by the way, in the piece, say I think we should create—I mentioned the strategic petroleum reserve earlier. I think we should have a strategic clean tech reserve that helps U.S., both users and deployers of clean energy technology, stockpile key components of clean technology ecosystems, where we’re currently more or less entirely dependent on China. So I think that’s an important aspect of really supporting clean tech deployment in the U.S.

Stone: Having that domestic reserve.

Moore: Yeah, exactly. And the last thing I say is I actually think we should be open to Chinese imports of clean energy technology in ways that we haven’t been in the past. And I think we can do that in lots of ways, including by essentially taking some pages out of the playbook that China used when it negotiated a lot of technology transfer agreements from foreign firms in the early 2000s for joint venture and other similar arrangements. I think the time is right for lots of reasons to lifting tariffs on some of those imports. And I think we can include in there provisions about certain number of people in the U.S. making these things in the U.S., and things that would benefit the U.S. economy.

Stone: And the technology transfer, again, of course, as part of that.

Moore: Yes.

Stone: It’s interesting because that was, you know, one of the big sticking points, as China was really developing its economy. U.S. companies and other global companies were going into China. And one of the conditions for China to allow these companies to play in its market was the sharing of technology and the building of domestic manufacturing facilities in China. And it’s almost like that script has now been flipped. And you’ve pointed out that the United States is a major market. And there would be, I would imagine, strong desire on the part of Chinese exporters to access the market. And maybe that provides U.S. with some bargaining power.

Moore: That’s very much the argument that I make. And I might just add, part of the reason why I think it actually would be a really good time to negotiate those types of things is that—and, you know, we read a lot about this. China has a huge, essentially over capacity, over production problem in clean tech, where you have way too many producers making way too much of this stuff that the domestic market can’t absorb. And essentially, in order to—and profit margins are essentially zero in EVs.

And in order to solve that problem, in order to boost margins, actually become profitable, you need industry consolidation. And that really can only happen from a practical standpoint by scaling exports to large developed markets, especially the U.S. and the EU. Those are really the only foreign markets that have the size and scale to allow Chinese producers to consolidate market share and to become profitable. Otherwise, you know, the Chinese government and state would have to force that domestically. And for political reasons, that’s highly unlikely.

Stone: One of the consistent themes in U.S. foreign policy, particularly policy related to China over the last few administrations, has been to keep Chinese technologies out.

Moore: Right.

Stone: And I think we’re talking about a reversal of that. I mean, what would that take from a political standpoint to make that happen?

Moore: Will. You know—and I have to say, I think I was very kind of critical that the Biden administration—well, the first Trump administration put in place the first tariffs on Chinese solar panels and things like that. Although actually, even as I say that, there were some initial tariffs even put on by the Obama administration. But the first Trump administration started the current tariff wall, building the current tariff wall. The Biden administration built that wall even higher in a way that I was not particularly supportive of. So it’s been kind of a bipartisan approach, as you point out.

But I think the time has come to really rethink that. And the main reason is Hormuz. You know, we have probably permanently higher fuel prices as a result of that shock. People want to be buying EVs. But we don’t have—interestingly, the U.S. is one of the exceptions to EV demand increases. And I think the most likely explanation for that is we don’t have the cheap Chinese models that most other countries do.

So I think the time is right to think about how we can help lower energy prices for U.S. consumers while also negotiating better deals for U.S. workers that would channel investment from Chinese firms in ways that benefit the U.S. economy. So we’re not just shipping money overseas or something like that. I think that there’s some confluence of events here that would allow us to achieve all of these objectives.

Stone: Well, Europe is an interesting current case study on what’s happening, right? So Europe has opened up its market to a pretty significant degree to, for example, Chinese EV exports. And now we’re seeing some of the major European auto manufacturers really facing a crisis in terms of competing with these importers. We’re seeing job cuts to companies like Volkswagen, at unprecedented scale. What lessons should the United States take out of that? And again, I haven’t followed what’s going on in Europe that closely. But I am curious as to how this is playing out politically in Europe. That you, on one side, want inexpensive vehicles, but you also need to maintain domestic jobs.

Moore: Yeah, absolutely. Well, Volkswagen is a really interesting case. They’ve actually expanded their operations in China. And as I understand it, a key reason for that is actually technology transfer from some of their ostensible Chinese EV competitors. Which goes to the point, that I think we’ve reached a phase where U.S. auto manufacturers could actually really benefit from technology transfer from Chinese firms. And if we can negotiate arrangements that permit that and channel investment in ways that benefit U.S. workers and U.S. communities, I think that, at least in principle, could be a win for everyone.

But, you know, there is certainly the danger, as you point out, of overcapacity producing prices for EVs that are so low that essentially no one can compete. And I do think there’s a separate macro trade issue that has to be resolved. I was interested, actually, by the G20 finance ministers communique just a few days ago that explicitly didn’t name China, but it explicitly called on countries to reduce overcapacity and policies that contribute to overcapacity. So I think there’s a separate macro trade issue with China that has to be settled.

I would just say that’s not unique to clean tech. I mean, that’s the case in almost every manufactured—you know, steel ships. You could pretty much take anything that’s manufactured, any manufactured good, and say that things are kind of headed in a direction where it’s very hard for anybody to compete with Chinese manufacturers.

We’re in a political and policy moment in the U.S., and I think lots of other countries, too, where there’s just a lot of concern for affordability. One big chunk of that is energy prices. And the fact of the matter is that for most purposes, most applications for everyday consumers, clean energy can really reduce energy costs in big and important ways. So switching from internal combustion engine vehicles to electric vehicles, switching from coal and gas to renewables. You know, there are still technical hurdles. But on a sheer cost basis these kinds of things, these transitions, can actually do a lot to lower costs in most markets.

So I think we have to come to grips with the fact that Chinese products are the lowest cost way of doing that, the lowest cost way of reducing energy prices. And so if that is a serious political and policy priority, we have to start thinking now about how we lift or at least lower these tariff walls that the U.S. has created, and find responsible and common sense ways of lowering energy prices while also ensuring that that Chinese technology and investment would benefit the U.S. economy.

Stone: Scott, thank you very much for talking.

Moore: Thank you.