Joe Weisenthal: Ever since China switched to being a net importer of oil, there have been real concerns about the vulnerability of its oil imports and specifically its seaborne oil imports, by various modern navies, notably that of the United States. Yet that's why we saw China, you know, build these pipelines to deliver the deliver oil overland from Russia and from Kazakhstan. And so, given those concerns, given, you know, those fears that, you know, in the event of a conflict that pits China, you know, in the United States, you know, against each other, would China, you know, with the United States able to cut off the flow of oil to China?

Joe Weisenthal: Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.

Tracy Alloway: And I'm Tracy Alloway.

Joe Weisenthal: So, Tracy, we are recording this 1 p.m.. March 4th, 2026. And it's one of those days where you have to nail the hour and the minute because who knows what's going to happen.

Tracy Alloway: Absolutely. Of course, we are in the midst, of a war with Iran. And it's been an extraordinary week in markets. Massive surge in the price of oil, all kinds of concerns about the sheer logistics of getting oil, other as well as other commodities out of that region. Who's going to be affected? The ramifications are just global, for obvious reasons.

Joe Weisenthal: Yeah, there's clearly a lot to talk about, but there are some interesting angles in particular that you and I have been discussing, and we're going to try to hit all of those, individually in a lot of different episodes that are coming up. But for this particular episode, we want to talk about something that, obviously the US, Europe have been, I would say, the main subject of a lot of the the hand-wringing or the focus at the moment. So Europe, we know, has had to grapple with higher energy costs for a while. And clearly, you know, all this chaos in the Middle East is not going to be good, for that. But one thing that hasn't gotten as much attention is what this actually means for China, which is a huge, huge purchaser of oil from the Middle East.

Tracy Alloway: Right. This is really important. So obviously in the US we're sort of swimming with oil. We're an oil exporter. Is could this could be very good also for our gas exports to Europe. I mean, already we've seen this big increase in gas exports from the US to Europe, particularly just in the wake of the ongoing war in Ukraine. So this could be further, create further opportunities. But for all the countries that are, you know, major importers and China being one is obviously of, a very different dimension for them.

Joe Weisenthal: Absolutely. Also, can I just say that this particular topic is finally, finally an opportunity to touch on teapot refiners in China, which I always wanted to do an episode on. And for some reason we never got to it. But but now's our chance.

Tracy Alloway: I will learn what a tea I've known at times. What a teapot. Refiners, wait, what's your impression? If someone says teapot refinery? What do you. Think? Don't put me on the spot. Like, just imagine a little refinery.

Joe Weisenthal: Yeah, I mean, that's it, basically.

Tracy Alloway: All right, well, if that was a good guess. Yeah. The teapot. Yeah, I guess it's. I just think it has a cute name and so I like thinking about it. Anyway, I'm very excited to say we really do have the perfect guest today to sort of talk about the energy dimension from some angles that have that deserve and need more exploration in this precise moment. We're going to be speaking with Erica Downs. She's a senior research scholar at Columbia University's Center on Global Energy Policy. And, and an expert truly in this field. So, Erica, thank you so much for coming on. And lot.

Erica Downs: Thank you so much for having me.

Joe Weisenthal: What a not just for the sake of our audience, what do you give us? The sort of brief overview of your work. Tell us a little bit about what you do and your general field of study.

Erica Downs: So my research focuses primarily on the geopolitics of energy. And so I've been kept busy recently looking at China's energy relationships with Russia, with Venezuela, and of course, this week with Iran.

Tracy Alloway: So why don't you sum up, I guess, China's relationship with energy at the moment then? The only thing I know in in recent times that sort of hit the headlines is that China's been importing an enormous amount of oil, which both suggests that it needs oil, and it's an important thing for its economy to work, but also that, you know, maybe in the face of tighter supply coming from the Middle East, it has something of a cushion.

Erica Downs: So, yes, China has been putting a lot of oil into storage. They kick started their strategic petroleum reserve over 20 years ago and have been building it up precisely to have it moments like the one that we are in now. Now, China, as you mentioned, is a big importer of oil. About half the oil that they import come have half the oil that China imports comes from the Middle East. Most of those Middle East oil supplies pass through the Strait of Hormuz, which is now closed.

Joe Weisenthal: Talk to us a little bit about the volumes here that we're talking about. Tracy mentioned that obviously they're importing quite a bit and much of it keeping in storage, like, okay, we're talking about Iran or something. How crucial is that relationship. What do we know about its volume? What do we know about pricing? Tell us, some more details about this particular bilateral trading relationship.

Erica Downs: Sure. So last year China imported 11.6 million barrels per day, about 1.4 million barrels per day came from Iran. So that accounted for about 12% of China's crude oil imports. The main buyers of Iranian oil in China are the teapot refineries. I've been following the teapot refineries for a long time and I love to talk about them, so I'm very happy to hear you speak about them in your introduction. Yeah. So the teapots are small independent refineries. Many of them are clustered in Shandong province. They're not as big or sophisticated as the refineries operated by China's national oil companies or the new integrated refining and petrochemical projects. These are world scale projects that have, popped up in China over the past few years. So the teapots are much smaller, less sophisticated, and they rely on the discounts they can receive on sanctioned crudes, to boost their bottom lines. And in some cases, they probably depend on these crudes for their survival. So they're the main buyers of Iranian crude in China. The national oil companies that were, you know, lifting, you know, all of their audience crude to take back to China, you know, ten, 15 years ago are completely out of the Iran oil trading business, because of concerns about US sanctions.

Tracy Alloway: And I was going to say and just to bring this back to the teapots, you know, the reason why they are buying and the national oil companies, China's national oil companies aren't is because the teapots are more risk tolerance. And what I mean by that is that the national oil companies have a vested interest in maintaining access to the US dollar financial system. You know, these are global companies with global operations. They don't want to lose that access. Whereas if you look at the teapots who are still buying Iranian crude today, I suspect that they have little or no, you know, interest in maintaining access to the US dollar financial system. Sure, they'd prefer not to be sanctioned, but it sanctions being sanctioned wouldn't be catastrophic for them in the way it might be for Sinopec, the China National Petroleum Corporation. And so it's this risk tolerance, as well as the pursuit of discounted barrels that has made, the teapots the biggest importers of Iranian crude in China.

Joe Weisenthal: So I don't mean to go on too big of a teapot. Tangent. How's that for alliteration, Joe? Thank you. But how did we end up with this situation where we have these national refining giants in China, which I assume, you know, enjoy support from the state, and they enjoy all the benefits of scale. And then you have these tiny or smaller refiners, independent refiners that have sort of cropped up, like, how did that system actually begin.

Erica Downs: So sure. Happy to provide some background. So the teapot refineries which are actually called local refineries in China, sort of originated. They grew up, in China, in northeastern China to, process crude, from the Shengli oil field, you know, which historically was one of China's backbone oil fields. And for most of their existence, you know, these two pots, you know, did not have the right to import, and process imported crude. And this all changed back in 2015 when the Chinese government, you know, said that any, you know, that teapot two met certain requirements would be granted, licenses to purchase and process imported crude and the criteria that the teapots had to meet, you know, was for things such as, you know, sort of getting rid of highly, polluting, crude distillation units, building natural gas storage, believe it or not. And so, you know, teapots that met these requirements could, you know, apply for licenses and get a license and they'd be given a quota. And they you could use that quota to purchase, from outside of China's borders. And when I first started looking at the teapots, you know, around the time that they, got the permission to import crude, they had a pretty diverse, slate of suppliers, but as sanctions on, you know, countries, such as Iran, Russia, you know, Venezuela tightens and discounts, were on offer to entice buyers to take these barrels. But a lot of other, importers were consuming the teapot, stepped into the void.

Joe Weisenthal: How big are these discounts? So intuitively, okay, a country gets sanctioned and then a bunch of buyers. And that makes a lot of sense. Don't want to deal with it or don't want to risk getting sanctioned themselves. So when Iran, by dint of sanctions, essentially forced to sell a significant amount of their oil to these two parts, do we have a sense of like what the pricing is on these deals relative to overall oil prices?

Erica Downs: The discounts for China's teapot refineries I receive unsanctioned barrels are certainly attractive enough to make them seek them out. These discounts, change over time. You know, they're often reported in industry press, as you know, a certain number of dollars, you know, cheaper than the price of Brant crude. And just to give you a sense of how important these are to the teapots, you know, Reuters ran a piece, I believe, back in 2023 where they said they had calculated that China had saved $10 billion on crude oil imports by importing these sanctioned crudes.

Joe Weisenthal: Okay, so you can imagine that in the current scenario where you have these teapot refineries that are, you know, benefiting from the discount between sanctioned and non sanctioned oil, they're going to be hit by it, I guess less oil.

Erica Downs: Yeah. In the system in general. But I mean Russia still exists Russian oil is still out there. Could you see a scenario where they just start importing more Russian oil to offset some of the supply that's lost in the Middle East? Yeah, I do think that is likely. And I will say this is actually a tough time for the teapots because last month, the Trump's removal of Venezuelan President Maduro from office and the US taking control of the marketing of some of Venezuela's crude, sort of raised questions about how much oil, then how much Venezuelan oil would China still be able to import and at what price, and sort of in anticipation of a potential shortfall in their Venezuelan oil imports, the teapots turned to Iran and specifically to purchasing, Iran money and heavy crude, which was is, you know, a decent substitute and, you know, certainly could be obtained at a discount. But now, of course, you know, with the war in the Middle East, you know, this is sort of raising questions about, the teapot supply of Iranian oil. The good news, I guess, for China as a whole, is that they are sitting on substantial strategic and commercial oil stockpiles. You know, that should, you know, that provide 120 days of China's net crude oil imports at the 2025 level. So, you know, what that means is that if all of you know, China was unable to import any oil at all, which obviously isn't going to happen, they could, you know, rely on their stockpiles for four months of crude oil imports. And so if you look at the sort of Iranian crude and, you know, perhaps other flows that might be disrupted by the closure of the Strait of Hormuz, you know, they're sitting, in a pretty good position. Also there is, you know, a good amount of Iranian and Russian crude in floating storage in Asia, off the coast of China and Malaysia. And, you know, this had been sort of building up the for the U.S. and Israel launched their strikes on Iran. And there is also Iranian oil sitting in bonded storage in Chinese ports, which could be tapped into.

Joe Weisenthal: You know, you mentioned the significance of the you know, we're talking about the Iran China trading relationship. How significant was Venezuela in this picture? And what do we know about the picture now? Because I think we're I think there's still Venezuelan oil. Now going to China right now. But how. Talk to us about the the significance of the of that piece of the puzzle.

Erica Downs: Yeah. So Venezuela is a smaller crude oil supplier to China than Iran last year. Venezuela, you know, supplied, you know, around 400,000 barrels per day, of crude oil to China. So you're just looking at, you know, a few, very, very small share of 3 or 4% of China's, total crude oil imports last year. However, you know, virtually all of that oil was going to the teapot refineries. So while you can say, oh, China is not going to be hit too hard if, you know, this is 400,000 barrels per day of crude oil imports from Venezuela, it does sort of make life more difficult for the teapot refineries. Now, Secretary Wright did say a couple weeks ago that, you know, the U.S. had sold some Venezuelan crude to China. I don't know who the buyers are. And of course, for the teapots, you know, price is also an issue. I mean, yes, they would like to, you know, continue to import those Venezuelan barrels because they're used to processing, you know, that type of crude. But it the current situation, means that they might be even if they can still, you know, buy a fair amount of Venezuelan oil, you know, that's being marketed by the U.S.. I think a big question for them is, at what price.

Tracy Alloway: Can we go back to China's Strategic Petroleum Reserve for a second? Because I feel like the US reserve was such a big talking point during the Biden administration, and it kind of, you know, soared into our collective consciousness. When we think about China's SPR, what are the actual goals there of the Chinese state? Why did they establish this? What are they thinking about? And then also, what do we actually know about it?

Erica Downs: Yeah. So the main reason China established its strategic oil reserve is because China is a major importer of oil. China switched to a net importer of oil in 1993. And as its reliance on imported crude grew, there were real concerns about supply security in China. And so building a strategic petroleum reserve, is one of the things that they did, to make sure that they were in a good position, to deal with, unexpected disruptions to their oil supplies. Now, one thing, as I mentioned earlier, I've been looking at this issue for for quite some time, and I recall, going back, over 20 years ago, there were discussions at China about, do we need this? Can we afford it? You know, how big a stockpile, do we want to invest in building? And, as you may know, for states that are members of the International Energy Agency at which China is not, but the International Energy Agency, requires members to hold, stockpiles, equal to, 90 days of net oil import coverage, and so that's the benchmark that has been used in a lot of Chinese discussions about its spread over the years. And, again, I remember, going back 15, 20 years ago, and you did have voices in China that were saying, you know, we already import a lot of oil. Our imports are going to continue to grow. You know, can we really afford to build 90 days of net oil import coverage? You know, but if you fast forward to today and you look at the different estimates out there about how much oil is sitting in storage in China. Yeah. To include both strategic stockpiles as well as commercial stockpiles. You know how by oil companies, China holds more than 90 days of net oil import coverage. And so looking at the disruptions, to China's looking looking at the geopolitical sort of upheavals in, crude oil markets, just this calendar year, with the U.S. actions in Venezuela and now Iran. Yeah. The fact that China does is sitting on these, substantial stockpiles, you know, has to be a source of peace of mind and sort of a vindication for, undertaking this project.

Joe Weisenthal: Yeah. Tracy mentioned obviously all the fights about the SPR in the US under the Biden administration. And it's kind of weird because, like, you know, there's some question, why does the, you know, the US is a massive exporter, producer of oil now in a way that wasn't the case 20 years ago or 30 years ago, or at the time, certainly at the time that the US first conceived. So it's a little unclear what the point of an spread and so I'm not surprised that it's sort of used to lower the price of gasoline for consumers in a time of high inflation and so forth. In China, where, you know, the automobile, you know, they're switching rapidly to EVs, oil is not going to be as an important for that, and it's going to continue to be less important over time. How much is it about prosecuting a war at some point, and the prospect that they would completely get shut off from oil imports in the event of, in the event of aggression? And how much is that really what it's about being having the resources to fight a war if, and if and when that time comes.

Erica Downs: Yeah. No, I absolutely think that is part of it. Ever since China switched to being a net importer of oil, there have been real concerns about the vulnerability of its oil imports and specifically seaborne oil imports, by various modern navies, notably that of the United States. Yeah. That's why we saw China, you know, build these pipelines to deliver the deliver oil overland from Russia and from Kazakhstan. And so given those concerns, given, you know, those years that, you know, in the event of a conflict that it's China, you know, in the United States, you know, against each other, with China, you know, with the United States, be able to cut off the flow of oil to China. And just to put this, you know, sort of even in sort of broader historical context, you know, if we go back to, you know, the 1960s at the time that the, the relationship between China and the Soviet Union was following, it was falling apart. At that point, China was heavily reliant on the Soviet Union for refined products needed to fuel its military, like jet fuel. And so as those tensions between China and the Soviet Union increased, the USSR did cut back on refined oil product exports to China. China has firsthand experience of being in, you know, a tense relationship with another major power and having that major power, you know, squeeze the country with respect to imported oil products.

Tracy Alloway: Actually, this might be a good time to ask just about China's foreign policy more broadly. So I saw, you know, they issued a statement following the attacks, and I read one person describe it as the kind of thing you would expect from Brussels, you know, very. Yeah, yeah. Very generic expressing concern over the situation in Iran. But they also expressed concern over the attacks on the UAE, for instance, which you know, is is of economic importance to China. Certainly. What's your sense of, of, I guess, what is at stake beyond just oil for China in this particular situation?

Erica Downs: You know, sort of looking beyond China's energy imports from the region, China national oil companies are big producers in Iraq. So they have a number of upstream assets in that country. Chinese firms are also involved in building other types of infrastructure here in the region. For example, there are Chinese companies that are building, operating, renewable energy facilities, especially, solar farms in the region. And because of this, we've seen, you know, Beijing part not just, you know, for, everyone to help ensure the free flow of energy from the region, but also to make sure that civilians aren't hit. Right, because you have Chinese citizens on the ground there, doesn't want them to get hit. You know, it doesn't want any of its sort of physical economic assets, infrastructure in the region, to, you know, to, to get hit.

Joe Weisenthal: Joe, I just remembered in Dubai, kind of outside of like main Dubai, there was this mall and it was called, I think it was called Dragon Mart and it was just a Chinese market in Dubai. You would love it. Absolutely. Like everything imaginable was available there. And like when you went there, it felt very, very surreal, actually.

Tracy Alloway: Yeah. I would love it now might I?

Joe Weisenthal: That sounds like the most interesting thing I've heard of in Dubai. Nothing else. I've never heard nothing else about Dubai has ever, made me.

Tracy Alloway: I can tell you more interesting things. So it's the North Korean restaurants and things like that.

Joe Weisenthal: Oh, I have I want to check out a North Korean restaurant.

Tracy Alloway: Yeah. Maybe you do. And maybe you don't.

Erica Downs: I've been to one in Beijing. Oh, really? Many years ago.

Joe Weisenthal: Yeah, I've read about them. I've read about, like, the chain of, North Korean.

Tracy Alloway: I'm very. I mean, it's just Korean food, right?

Erica Downs: I mean, well, it's slightly it has its own twist. It's good food. Not so great surveillance. That's how I'll. I'll. Or actually, maybe the surveillance is a little too good.

Joe Weisenthal: Yeah, yeah. There we go. Good food. Excellent. That's like. It's a great, like, a great Yelp reviews. The surveillance was great. The food. Good food. Excellent surveillance. Surveillance. For the food. Stay for the. Stay for the facial recognition.

Tracy Alloway: You know, I get the impression with just a stick on Chinese foreign policy for a second. One thing I hadn't realized up until recently, and it just hadn't dawned on me. It's like China doesn't have any, like, formal, like, treaty allies. You know, there's like, nobody unlike the U.S, like we have an agreement. We, then, you know, we're obligated or we agree to defend them. I don't think China does it that way. Talk a little bit more like I was surprised, you know, at the kind of interest you mentioned, the sort of neutral ish tone. It's like telling Iran, like, be careful in your retaliation and who you hit for obvious some of the reasons that you mentioned, you know, but it's certainly not like we're seeing China make any statement like we're going to, we're going to up our shipments of, weapons or defense weapons to Iran. Maybe they're doing some of that covertly, but they don't make a big announcement of it. But it strikes me like that's very telling, that even a country with whom they have a fairly substantial economic partnership with and maybe some sort of ideological alignment in terms of countering, Western hegemony and so forth, you know, still, even with them, they don't there's nothing formal, formally established. Talk a little bit more about how they think strategically about the region beyond just the sort of, commercial commercial needs.

Erica Downs: Sure. So China wants to maintain good relations with Iran, and it also wants to maintain good relations with Saudi Arabia, UAE, Oman, other states in the region. And so, China historically has, you know, sort of walked this tightrope, you know, in trying to, you know, balance relationships, you know, the Saudis with the Iranians and, you know, I think they have been pretty successful in pulling that off. Now, China has no interest in getting bogged down in a military conflict in the region. So we're not going to see trying to get involved in that. They are happy to the a mediator and in fact, Beijing, you know, recently announced, I think just a few hours ago that they are sending their special envoy to the region for mediation purposes. And so I think that China likes playing that role. I think it certainly, you know, sort of bolsters their image as a sort of responsible outside power. That is, you know, getting involved in the region, you know, with the goal of restoring peace and stability.

Joe Weisenthal: So one thing I wanted to make sure to ask you is just more broadly, you've spent your entire academic career studying Chinese energy markets and Chinese energy policy. What's the one thing you think people should know about that particular market, or the one thing that makes China unusual in the grand scheme of global energy policies?

Erica Downs: So one thing I'd like to highlight is China's change in role in the global energy system. So for most of the time that I've been following China's energy sector, you know, it's in looking at China's role in global energy markets. It's been China as a growing importer of oil and natural gas, both pipeline gas now and GE as an opportunistic, full importer. But there is an important change underway in China, you know, which is that the country is transitioning to a lower carbon future. You may have seen a lot of news reports about record record level of, you know, wind and solar capacity installations in China. Part of this is certainly about decarbonization. It's also about energy, supply security. You know, that I think one thing China has taken away from the war in Ukraine from, you know, us activities in Venezuela, you know, the current war in Iran is that, you know, it's better just to be able to sort of rely on energy sources within your own borders. There's an energy supply story as well. There's an energy security story for China. But the other thing that's going on here is that China wants to continue to be the supplier of the green technologies that the rest of the world needs for decarbonization, energy security, you know, access to reliable and affordable energy. So those three sets of goals, and so we are seeing China emerge as this green tech superpower, if you will. And so it's very interesting to sort of think about this, you know, in China playing this role, you know, at the same time that the United States is, advancing this agenda of energy dominance, which of course, is focused on, you know, exporting more U.S, LNG and oil and sort of using those as a source of leverage, you know, a nice sort of when I think about that, my instinctive reaction is, you know, maybe more of it. Of course it could be a characteristic, you know, but I think of it as being more of a stick, whereas I think that, you know, China has, you know, something very different that it can offer that, you know, might be quite appealing to a lot of countries in the world. There's a lot of countries don't want to spend a lot of their foreign exchange and energy imports. They don't want to be vulnerable to supply disruptions. And so if China is coming along and saying that, okay, you have, you know, great solar energy resources and, you can buy solar panels for us, or you can hire or, you know, a Chinese EPC contractor to, you know, to to, you know, build you, you know, a solar farm, then, you know, countries don't have to spend as much energy and foreign exchange. And just as one example, you know, did a lot of work a number of years ago, like circa 2018, 2019, looking at why China, you know, was was building, you know, so many coal fired power plants in Pakistan when the country had, you know, sort of tremendous, you know, renewable energy resource, you know, wind and solar resources especially, especially solar. And when I was, you know, so I ended up doing this deep dive into Pakistan's energy sector. You know, one of the things I discovered is that they were spending a lot of, you know, very precious foreign exchange on, you know, importing fuel oil, you know, and now, you know, coal, you know, to, you know, to, you know, to, to, to to run these power plants and, you know, that was an issue. And now we are seeing there've been a lot of reports over the past year about how you have individual households and businesses in Pakistan that have been buying a lot of Chinese solar panels to put on their roofs, and that they have, you know, affordable, and reliable energy. And so I just whenever I, you know, hear about the Pakistan example, I sort of keep thinking back to that earlier research that I did and how, you know, this, you know, to a certain extent has to be, you know, helping Pakistan conserve foreign exchange or conserve foreign exchange that it previously, you know, we've spent on what have spent on energy imports. I don't know the size of the savings off the top of my head, but that's just, you know, one example I wanted to highlight.

Tracy Alloway: Yeah, it does seem like, you know, for most of recent history and still today, like, fossil fuel dominance is incredibly important. And it's not like that's not going to change overnight. And so, yes, you have incredible, fossil fuel capacity reserves in the U.S, Latin America, the Middle East and so forth. But the longer term trend, as you spell it out, seems to be like at some point that much of the world just doesn't need as much of it. And their ability to reduce their energy bill will come from Chinese technology, whether we're talking about wind, solar or batteries that has been installed, domestically and potentially reducing their bill. And so the payments that were one point going to the US or going to the UAE, etc., switches to being payments for renewable technology from China.

Erica Downs: Yes. Great.

Joe Weisenthal: Yeah. I saw I summed up the I mean, I could also I mean, the other sort of thing here is that, I mean, I think that and to be sort of, you know, looking again at China, you know, China's demand for diesel and gasoline, has already peaked in the case of diesel, a lot of it has to do with the property collapse. I mean, you know, with gasoline, it's been the rapid uptake of these. And as a result of this very rapid, uptake of EVs, the International Energy Agency, you know, some of China's national oil companies, you know, have moved forward their date for when China's, you know, overall oil demand is going to peak. You know, and before I was seeing them, you know, is dates closer to 2030 now, 2027. And at one point, Sinopec, one of the national oil companies, had even said, you know, 20, 25. And so, as I, you know, just mentioned, we have seen, you know, demand for for road transport fuel peak, but China will still need oil or petrochemicals, which in turn are used to, you know, in the are used in some of these green technologies, right. Like, you know, we need you know, petrochemicals feedstocks as inputs for, you know, EVs for solar panels for the DM ion batteries. So there is, you know, there is a link there. And we will see, you know, China still needs to, you know, import some oil, to, you know, continue to be a leader in manufacturing these technologies.

Tracy Alloway: So I, I know you're not a macro economist, obviously, but when you when you look at what's happening now in Iran and the situation in the Middle East, what's your best guess for how this actually feeds into Chinese inflation and the broader, I guess, energy energy prices. Like, how much could we actually see domestic energy prices in China go up as a result of current curtailed supply? And how much of that curtailed supply can just be offset from the reserve?

Erica Downs: Yeah. So we are seeing higher prices for energy. I know we've been talking a lot about oil, but I'd actually like to turn to LNG. Great to answer this question. So China imports almost one third of its LNG from the Middle East. Almost all of that comes from Qatar. You know, with, you know, a little bit from the UAE and Oman. Oman obviously lies outside the Strait of Hormuz. But if you look at the supplies coming, you know, first and foremost from Qatar and that little bit from, you know, from the UAE, that those supplies are no longer flowing to China, you know, and, you know, China doesn't have a massive, you know, strategic gas reserve, you know, the way it does with oil. And so, you know, to the extent, you know, so the the longer you know, the supply of LNG from, you know, from Qatar, to China is, you know, is disrupted. You know, the more China is going to be under pressure to cobble together a response, I think in the very short term, you know, one of the big things, you know, that they can do is find ways to use less gas. And here, you know, sky high, you know, prices for spot cargoes, you know, is going to help China do that, you know, and there have there has been reporting in industry press where, you know, unnamed, you know, traders, you know, certainly at the big stage, companies, you know, have been saying that, you know, we're not going to buy anything on the spot market right now because prices are just too high.

Joe Weisenthal: Do they do they frack in China? Have they got into the fracking revolution yet? Is that, is that a thing over there?

Erica Downs: Yeah, they have. And actually, last year, 43% of China's natural gas production came from unconventional sources. And this statistic is really of interest to me because I remember, you know, back when the US shale revolution, was taking off, people would often note that on paper, China's, shale resources were, you know, sort of either, you know, were bigger than or, you know, almost as big as the United States, like, basically. But, I mean, this is going back like 15, 16 years. But basically, China had big shale resources on paper. And so I would often get the question, are we going to see a shale revolution in China? And my answer was I it's going to be more of a shale evolution. You know, because of, you know, different, factors in the United States and China, like in the United States, for example. You know, a lot of this show that that people who were sitting above, you know, promising shale resources could be compensated for that, not so much in China. You know, in the United States. You know, the, shale revolution was really launched by these, you know, small, nimble companies, you know, really to maximize profit. Whereas in China, if you look at all the, you know, upstream oil and gas assets, they're concentrated in the hands of China's national oil companies, you know, which are state owned, maybe not as nimble and certainly, you know, and so, you know, there are a number of different factors that just, you know, to that I can wait.

Joe Weisenthal: I'm actually I can. I'm really interested in this because if you think about China's, you know, large infrastructure projects and it's renewable build out, it feels like they basically are able to flip a switch and say, like, we want to go big on this. And then they go big on this relatively quickly and probably faster than it usually happens in places like the States. But you're saying for this one thing for for fracking, that wasn't the case, which is very surprising to me.

Erica Downs: Yeah, it's been a much more gradual build up of, you know, unconventional oil, gas production in China. And of course, you know, when I say 43% of gas production, is from unconventional sources, you know, that's also including things like, like type gas. It's not all shale, although shale is absolutely, part of the story. Yeah. And so, you know, to your point, yes. This was a sort of, much gradual this was like a much more gradual buildup in, unconventional gas production.

Joe Weisenthal: All right, Erica Downs, fascinating conversation. I learned a lot in, 45 minutes. Really appreciate you coming on on lots. And, Yeah. Thanks for joining us.

Erica Downs: Thanks so much for having me.

Tracy Alloway: Tracy. That was a really interesting conversation. I didn't know that about the, I mean, I guess I'm not surprised that there were small refineries, but that they served this very strategic purpose of not having those international, I guess, liabilities. Right. They don't have the same world. Yeah. System that they've built outside of, I guess, like the more regulated official energy industry.

Joe Weisenthal: It's and it's fascinating to me a it's a good exercise in branding because I just find the teapot name so compelling. But also it's like an entire arbitrage industry, right?

Tracy Alloway: Yeah. Yeah. No. Makes sense. Right. Like oil is there's always going to be someone sanctioned. Right. That's that seems like safe. There's always especially three. Certainties in life death, taxes and someone, somewhere is going to have their oil sanction.

Joe Weisenthal: That's absolutely true.

Tracy Alloway: And so yeah, but they're going to sell it and they're going to sell it at a discount. And obviously any buyer of sanctioned commodities is going to be taking on some sort of risk that they're going to get slapped with, like a secondary sanction or penalty and so forth. So it makes sense to have a sort of a, you know, decentralized cottage industry, cottage industry. It's another cute something that isn't really, it's all very cute. It's all very cute. But in this whole the yeah, this separate industry that does not have the same they're not exposed. The same way. Yeah.

Joe Weisenthal: The other thing I was very interested to hear, obviously the discussion around the Strategic Petroleum Reserve was very interesting. This idea that, you know, there might be foreign policy considerations behind building up that strategic supply. Also the idea that shale hasn't taken off as fast in China, like, again, that really surprises me because me too. We're so used to hearing that one of the benefits of a command economy is that you can more or less, you know, I directed this big stuff, and it doesn't seem to have happened in the case of shale. And again, maybe that maybe that's more of a strategic decision.

Tracy Alloway: I was going to say. Yeah, I mean, what I would surmise and there's just speculation is like no, like the big priority is the renewables. Renewables, the big. Priority is batteries, solar, wind and so forth. And they've and I do think this is like going to be the big I don't know how long would take place, but the big shift that's already happening, I guess under underway is this like a bunch of other countries that aren't the US and China are going to want to reduce their, energy import bill?

Joe Weisenthal: Yeah. And they're going to swap it for an energy technology bill that they license from China. And that is a long term. I think. That's a really important point. It's a really important trend. And, events like the war are, in the short term, going to raise China's import bill and others. And in the, long term or the medium term, encourage more countries to accelerate their transition. So that's a pretty big story. Pros and cons. Yes.

Tracy Alloway: If there's anyone out there who's working in Chinese shale or fracking or has attempted to work in Chinese shale or fracking, I'd be very interested in talking to them.

Joe Weisenthal: So I won't. Touch the, the land man of China. I. Haven't watched the Land Man America version. But I thought that would be interesting. You got to watch it.

Tracy Alloway: All right. Shall we leave it there? Let's leave it there.

Joe Weisenthal: Okay. This has been another episode of the Odd Lots podcast.

Tracy Alloway: I'm Tracy Alloway. You can follow me @tracyalloway

Joe Weisenthal: And I'm Joe Weisenthal. You can follow me @thestalwart

Tracy Alloway: Follow our guest Erica down. She's @EricaDowns Follow our producers Carmen Rodriguez @carmenarmen, Dashiel Bennett @dashbot and Cale Brooks @calebrooks

Joe Weisenthal: And for more Odd Lots content, you should check out our daily newsletter. You can find that at bloomberg.com/oddlots And you can chat about all of these topics in our discord 24/7 that discord.gg/oddlots And if you enjoyed this conversation then please leave a comment or like the video. Or better yet, subscribe! Thanks for watching.