Impact of Iranian Regime Change on China’s Oil Security, By Paul Walker

The U.S. airstrikes on Iran's nuclear facilities at Fordo, Natanz, and Isfahan, have escalated tensions, raising the hypothetical scenario of Iran's regime collapsing and a U.S.-aligned government taking control. Iran is a significant oil supplier to China, reportedly accounting for a substantial portion of its crude imports. I will look at the impact of such a regime change on China's oil security, assessing Iran's role in China's energy supply, the implications of a U.S.-controlled Iran, and the potential for heightened U.S.-China conflict.

China, the world's largest oil importer, relies on foreign crude for approximately 70% of its energy needs, importing 10.1 million barrels per day (bpd) in 2024, according to the U.S. Energy Information Administration (EIA). Iran has been a key supplier, providing an estimated 1.1–1.4 million bpd in recent years, accounting for 10–14% of China's total oil imports. Despite U.S. sanctions, Iran's oil exports to China have grown, facilitated by "dark pool" shipments, transshipment through countries like Malaysia, and discounted pricing. In 2024, Iran was China's fourth-largest oil supplier after Saudi Arabia (15–17%), Russia (15–16%), and Iraq (10–11%), with over 75% of Iran's 2.1 million bpd exports going to China. These shipments, often processed by independent "teapot" refineries in Shandong, are critical for China's industrial and economic stability.

Iran's oil is attractive to China due to its low cost, discounted by $10–15 per barrel compared to Brent crude, and long-term supply agreements, such as the 25-year strategic partnership signed in 2021. This deal includes Chinese investments in Iranian infrastructure in exchange for oil, strengthening bilateral ties. Beyond crude, Iran supplies petrochemicals and serves as a strategic buffer against Western influence in the Middle East, aligning with China's Belt and Road Initiative (BRI).

If Iran's regime were to collapse, whether due to military defeat, internal uprising, or economic collapse following the U.S. strikes, and a U.S.-aligned government were installed, the implications for China's oil security would be profound. This scenario assumes a pro-Western regime, similar to post-1979 Iran under the Shah, prioritising U.S. interests and reintegrating Iran into Western energy markets. Key impacts include:

1. Disruption of Oil Supplies

A U.S.-aligned Iran would likely face U.S. pressure to halt oil exports to China to comply with sanctions or geopolitical objectives. During the 2018–2019 U.S. sanctions period, Iran's exports to China dropped by 50% before recovering via illicit channels. A regime change could sever these flows entirely, removing 1.1–1.4 million bpd from China's supply chain. Replacing this volume would be challenging, as OPEC+ spare capacity, estimated at 5.7 million bpd in 2025 (primarily Saudi Arabia and UAE), may not be fully accessible due to U.S.-aligned states prioritising Western markets. Russia, constrained by sanctions and pipeline limits, cannot fully compensate, and alternative suppliers like Venezuela or Angola lack Iran's proximity and cost advantages.

2. Price Volatility and Economic Strain

The loss of Iranian oil would spike global oil prices, with Brent crude potentially exceeding $100 per barrel, as seen in projections for Strait of Hormuz disruptions. China, reliant on affordable energy, would face higher import costs, increasing refining and manufacturing expenses. Teapot refineries, which process 90% of Iran's oil in China, would struggle to secure cost-competitive alternatives, potentially raising domestic fuel prices. This could fuel inflation, projected at 2–3% in China for 2025, and strain industries like transportation and petrochemicals. China's $1 trillion annual oil import bill could rise significantly, impacting its trade balance and economic growth, forecasted at 4.5% for 2025 by the IMF.

3. Strategic and Geopolitical Risks

Iran's fall to U.S. control would weaken China's strategic position in the Middle East. Iran serves as a counterweight to U.S. influence, and its alignment with Washington could embolden U.S. efforts to contain China, particularly in energy markets. The U.S. could leverage control over Iran's 3.8 million bpd production capacity to redirect oil to Europe or India, reducing China's access. This would align with broader U.S. strategies to limit China's energy security, as seen in sanctions on Chinese firms dealing with Iran in 2024. Additionally, a U.S.-controlled Iran could disrupt China's BRI projects, such as the China-Pakistan Economic Corridor, which relies on regional stability.

4. Strait of Hormuz Vulnerabilities

Even with regime change, the Strait of Hormuz remains critical, handling 20.9 million bpd of oil, including China's imports from Saudi Arabia, Iraq, and the UAE. A U.S.-aligned Iran might secure the strait, but any transitional instability, such as insurgencies by IRGC remnants or proxies like the Houthis, could disrupt flows. China's navy lacks the capacity to project power in the Gulf, relying on U.S. and allied naval forces for security. This dependency would increase China's vulnerability to U.S. pressure, potentially forcing concessions in trade or technology disputes.

To mitigate the impact, China could pursue several strategies:

1.Diversify Oil Suppliers: China could increase imports from Russia (up to 2 million bpd via pipelines and sea), Saudi Arabia, or African producers like Angola. However, Russia's output is near capacity, and Saudi Arabia may prioritise U.S. allies. Long-term contracts with Iraq or Kazakhstan could help but require infrastructure investment.

2.Accelerate Renewable Energy: China's investments in solar, wind, and nuclear energy, aiming for 20% non-fossil fuel energy by 2030, could reduce oil dependence. However, oil's role in transportation and petrochemicals limits short-term substitution.

3.Strategic Petroleum Reserves: China holds 1.2 billion barrels in strategic reserves, covering 90–100 days of imports. Tapping these could offset disruptions but risks depleting reserves if global prices remain high.

4.Diplomatic Manoeuvring: China could leverage its UN Security Council seat to push for sanctions relief on a new Iranian regime or broker deals with Gulf states to secure supplies. However, U.S. dominance in the region would complicate negotiations.

A U.S.-controlled Iran would heighten U.S.-China tensions, setting the stage for broader conflict. The U.S. could use Iran's oil as a geopolitical weapon, restricting China's access to pressure Beijing on issues like Taiwan, trade tariffs, or technology bans. China, viewing energy security as a national priority, might respond with economic measures, such as dumping U.S. Treasury bonds or restricting rare earth exports, escalating into a trade war. Militarily, China could expand its naval presence in the Indian Ocean or support proxies like the Houthis to disrupt U.S. interests, though direct confrontation is unlikely given China's limited power projection.

The Taiwan Strait, where China has increased military drills in 2025, could become a flashpoint if the U.S. exploits Iran's fall to pressure Beijing. Posts on X and Chinese state media, like Global Times, warn of U.S. "hegemony" in the Middle East, suggesting China may frame any oil cutoff as an existential threat. While a hot war is improbable, a prolonged economic and diplomatic standoff could destabilise global markets, with Brent crude volatility impacting both nations.

The scenario of Iran's regime collapsing and falling under U.S. control is speculative and faces significant hurdles. Iran's regime has shown resilience, surviving sanctions and protests since 1979. The U.S. strikes targeted nuclear sites, not regime infrastructure, and President Trump has emphasised avoiding ground operations. A regime change would likely require internal collapse or a prolonged military campaign, both of which face resistance from Iran's security apparatus and public nationalism. Even if achieved, a pro-U.S. government might struggle to govern amid IRGC insurgencies or Shia clerical opposition, complicating oil exports.

For China, the immediate risk is supply disruption, but long-term impacts depend on the new regime's policies and U.S. intentions. A transitional period of instability could mirror Iraq post-2003, with oil production dropping 20–30% for years. China's diversified import strategy and reserves provide a buffer, but prolonged exclusion from Iranian oil would strain its economy and force reliance on costlier suppliers.

A regime change in Iran leading to U.S. control would significantly threaten China's oil security, disrupting 10–14% of its crude imports and spiking global oil prices above $100 per barrel. This would increase China's import costs, fuel inflation, and weaken its strategic position in the Middle East, potentially escalating U.S.-China tensions into a broader economic or geopolitical conflict. While China could mitigate impacts through diversification, reserves, and diplomacy, its dependence on the Strait of Hormuz and limited naval power heighten vulnerabilities. However, the likelihood of a complete Iranian collapse remains low due to Tehran's resilience and U.S. reluctance for ground engagement. The more immediate risk is partial disruptions from ongoing tensions, which China can manage through existing strategies.