Columbia Energy Exchange: Iran Conflict Brief: How the Iran Standoff is Rewriting US-China Relations

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The Iran crisis is in its 80th day. Right now, roughly 1,500 vessels laden with oil, natural gas, fertilizers, and oil products sit trapped in the Persian Gulf by a dual US-Iranian blockade. One thing is certain: prolonging this standoff for another 80 days risks triggering profound global economic consequences.

Global oil inventories are depleting fast and are projected to hit critical levels by the end of June. 

For the Trump administration—caught between accepting Iranian power over the Strait of Hormuz or risking a major military escalation—the path of least resistance may be to keep maintaining a naval blockade of Iranian oil sales to China. The stakes escalated further this month when Washington sanctioned Hengli Petrochemical—China's second-largest independent refiner—prompting Beijing to retaliate with unprecedented blocking rules against US sanctions.

How will this high-stakes standoff play out in the coming weeks? And how will the worsening US-China rivalry reshape the Middle East conflict?

Today, host Daniel Sternoff sits down with Cory Combs, Head of Supply Chain and Critical Minerals Research at Trivium China. Cory leads Trivium's cross-cutting research on climate, energy, and industrial policy, advising both governments and multinational corporations. He joins us to break down the volatile triangular relationship between Washington, Beijing, and Tehran, and what it means for global energy security and the Strait of Hormuz. 

Credits: Hosted by Daniel Sternoff. Produced by Mary Catherine O'Connor, Caroline Pitman, and Kyu Lee. Engineering by Gregory Vilfranc.

Transcript

Daniel Sternoff: Events in the Middle east are changing quickly, and the complexities of understanding the global energy landscape grow deeper by the hour. Join me as we talk to leading experts on the latest developments in the region and what it means for the rest of the world. Welcome to our Rapid Response series, the Iran Conflict Brief, a special edition of the Columbia Energy Exchange podcast. I'm Daniel Sternoff, a senior fellow at the center on Global Energy Policy. We are recording this podcast on Monday, May 18 at 2:00pm in Washington, D.C. 10:30pm in Tehran and 10 and 9:00pm respectively in Abu Dhabi and Riyadh. The Iran crisis is in its 80th day many of you may remember around The World in 80 Days, the classic adventure novel by Jules Verne in which his protagonist circumnavigated the globe in 80 days by train, ship and elephant. The Novel was a 19th century celebration of an interconnecting world. Published in 1873, just after the completion of the Suez Canal, the first American transcontinental railway, and the linking of rail lines across the Indian subcontinent. These past 80 days have been the story of a disconnecting world with some 1500 vessels laden with crude oil, oil products, natural gas, fertilizers, chemicals and other goods trapped in the Persian Gulf by a dual U S Iranian blockade. It seems clear this standoff can't last another 80 days without catastrophic economic consequences. Crude oil prices have settled into an illusory equilibrium. The largest supply disruption in history is being cushioned by the release of inventories. Strategic and commercial oil stocks oil on water, waivers of sanctions, crude. But inventories are rapidly depleting and will probably hit critical levels by the end of June. These supply disruptions are simply untenable for the global economy and like most things that can't go on forever, probably won't. But how will they end? Pakistan continues indirect mediation between the US And Iran over a memorandum of understanding to end the war, but leaks suggest gaps over nuclear issues in the Strait of Hormuz remain irreconcilably wide. An impatient President Trump will reportedly hold a Situation Room meeting early this week to discuss military options to break the deadlock. This might include taking a mulligan to resurrect Project Freedom, a short lived attempt by the US Navy to encourage commercial shipping through Hormuz. Over the weekend, a drone struck the edge of the UAE's sole nuclear power plant, a clear reminder that Iran is prepared to target critical energy infrastructure in the Gulf states if military hostilities resume. President Trump appears to have only bad options, and if his choice lies in acquiescing to the reality of Iranian strategic power over the Strait or a risky military escalation. The path of least resistance may be to keep maintaining a naval blockade of Iranian oil sales to China. That embargo was reinforced this month by sanctions on Hung Li Petrochemical, China's second largest independent oil refiner, a step that pushed Beijing to deploy for the first time ever, new blocking rules to counter US Sanctions. I am joined today by Corey Combs, the head of supply chain and critical minerals research at Trivium China, a strategic advisory firm. Corey directs Trivium's cross cutting research on climate, energy and industrial policy and advises governments and multinational corporations. Prior to joining Trivium, Corey consulted on renewable and nuclear energy technology commercialization at the U.S. department of Energy, and he studied Chinese politics and energy economics at the Johns Hopkins School of Advanced International Studies. Given that President Trump has just concluded a summit in Beijing with President Xi Jinping, I can think of no one better to discuss the triangular relationship between Iran, China and the United States relating to oil flows, sanctions, and the Strait of Hormuzzi. Good afternoon, Corey, and thanks for joining.

Cory Combs: Thank you so much. Absolute pleasure to be on.

Daniel Sternoff: Wonderful. So, Corey, I'd like to get your impressions of the Trump sheep meetings, particularly as it relates to Iran and Hormuz and some of the broader industrial impacts on China. But before getting to the summit, let's wind back the clock to some of the developments that preceded it. So China obviously has essentially been Iran's only oil customer pre war, buying around one and a half million barrels per day of crude oil, despite a US Sanctions regime that has driven China's mega state owned refiners away from Iranian oil. Earlier this month, treasury added Hung Li Petrochemical to its sanctions list. And this development caused mofcom, China's Ministry of Commerce for the first time to activate new blocking sanctions to counter the U.S. move. So the U.S. has sanctioned smaller Chinese oil terminals and refiners before. What was it about Hung Li that that caused China to roll out these blocking sanctions? So maybe walk us through what's different here and how exactly these blocking sanctions will work.

Cory Combs: Absolutely. So the blocking rules were initially formalized in 2021, so it's been a little while. And critically, they round out China's lawfare playbook. Really. This is Beijing's phrasing. Obviously different observers can disagree with the framing here or the characterization, but they're viewed more as a defensive mechanism. Basically, China has these outbounds, you know, anti foreign sanctions law. It has these other tools but domestically, how do you limit the impacts of foreign sanctions on China? And the blocking rules are that theoretical piece of the puzzle. And as you say, they had not been imposed until just this past month. I think what is critical here, as you know, the Office of Foreign Asset Control in Treasury in the US side had sanctions, many refineries before that, most of the teapots, these small refineries in Shandong, broadly speaking though those sanctions had limited impact. They don't have much teeth. And the key reason is that the teapots, the true teapots, we'll get to the distinction in a second. The true teapots have very limited exposure to the US dollar. The banks that finance them have very limited exposure to the US dollar. And that's by design. I mean this has been years and years of effort to insulate that segment. Hung Li is different. Hungley is one of the private mega refineries that has integrated operations across transportation fuels, across petrochemicals of other so and it has significant exposure to the US dollar in global trading. And more importantly, the banks that give it lines of credit have direct exposure to the US dollar system. And so I think for Beijing, it can tolerate a significant number of sanctions on the shadow fleet and certainly on its own teapots. But when it comes to Hung Li, what that is pressing on, what that's contesting is US is Chinese banks access to the US dollar system. That is a line that Beijing has to hold. So more than Hung Li specifically, I think this is about the precedent. Where can the oppose its influence and where does China have to step in and say no, you're not allowed to press on this piece and we're not going to allow anyone to comply with those sanctions. Now there is a bit of a wrinkle just in terms of the US has threatened but has yet to actually activate secondary sanctions on banks and others. But I think this is both sides drawing lines in the sand right now.

Daniel Sternoff: Well, thank you for that. Just a couple of quick follow ups. There was a Bloomberg report that China had guided financial institutions to pause lending to Hung Li. And that's a little bit contradictory to rolling out the blocking sanctions in order to tell everyone not to comply. And I don't know if that report preceded the blocking sanctions, but it's very contradictory what's going on here.

Cory Combs: Yeah, I think from Beijing's perspective it's not contradictory. There are two different goals being served. One is the signaling exercise saying hey, we will, we will draw a line in the sand and there is a limit at which we will really mess. It's really threaten or attempt to threaten the US's ability to impose sanctions. At the same time, they're not actually trying to incur secondary sanctions right now. And so I think, I think in the immediate term, I mean, we saw this when the Iran, when, sorry, when Russia invaded Ukraine very early on. There's a lot of disanalogies in this case, but there are certain pieces to note. One of the first things that Beijing did was, was actually limit consumption by the state refiners, not by the independents of Russian oil and gas. Why was that? Not because it was fully complying with the US sanctions, but because it was trying to figure out its strategy and make sure that what needs to be safe in the system is safe and the parts that can get away with continuing to consume the sanctioned material could do that. So there's always a bit of planning buffer around that, there's a bit of timing buffer. So I think both things are true. Beijing is, especially for the entities that are really exposed to the US dollar, Beijing doesn't really want to accelerate the process of US rolling out secondary sanctions. At the same time, it's making clear that it will push back if and when needed.

Daniel Sternoff: Right. So what do you think this means for international entities that have exposure both to the US dollar and to exposure to China? So I mean, if you were the lawyer inside of commodity trading houses, your vtol, your Trafigura or maritime insurers, and you're sitting here, here is a law in the books that says if you comply with U.S. sanctions, you could be exposed to being sued, or maybe you could speak a little bit about what the consequences would be. And at the same time, obviously you need to transact in US dollars. So this, this is the horrible position to be squeezed between these two. So what does this mean for international entities and what sector or type of firm might kind of get put in the crosshairs first to test these two regimes?

Cory Combs: Yeah, so I think the first is somewhat optimistic news. I think a lot of entities that have the single greatest secondary exposure risk, they've pretty much bought into one system or the other. Most actors have aligned themselves to be very exposed to the renminbi and less exposed to the USD or vice versa. Obviously more in the latter camp, but when it comes to dealing with sanctions production, a lot of actors on China side already in that former camp, but there are a lot of the teapots they sell domestically, but that product still moves through the rest of the world. And so a lot of the issues is tracing this. One of the questions is how far down the list do secondary sanctions go? The first real risk is banking. I mean, there are a lot of lenders and again, the teapots themselves are pretty much funded by, you know, local Shandong, midsize banks. Right. But then you get to the larger banks, the national banks, international banks that are lending to the likes of Hung Li. And again comes back to why China responded so much more vigorously to Hong Li than to the teapots, the small private finders. That gets a lot messier. And I know that many companies, many finances are still, lenders are still kind of unraveling the full extent of their exposure to see who their, who their clients clients clients are, you know, and if that could roll back on them. The other, as you say, is insurance, logistics. There's a lot of entities directly exposed. One of the key issues is, you know, pulling back a sec, a step here. The US has sanctions, a huge portion of the, the shadow fleet that moves sanctioned oil, sanctioned crude, but there's still an awful lot of sanctioned crude moving to China. And a large part of that is because it's been restructured so that, so that a small number of ships can cover the last stage. You can move the ships to off the coast of Indonesia, off the coast of elsewhere in Southeast Asia and it's that last leg. So there's still, there's a lot of gaps where you might think that, oh, you know, we've kind of cleared up our exposure, but if you somehow have unintentional exposure to the last leg in this step in the chain, you're still liable. And the other thing here is that ultimately we do expect someone to get pincered. It hasn't happened yet. But not only is there the US sanctions and then the blocking rules which China says basically you're not allowed to comply with sanctions, there's also the anti foreign sanctions law, there's also other mechanisms. At some point some company is going to be forced in the position of either not being able to deal in China or not being able to deal with the USD while being incredibly exposed to China. It is not a good situation. So as the legal mind on, again, I'm not a lawyer, it's not legal advice. But from the strategic advisory perspective, we are being very clear with clients. No one will expect to be the sacrificial lamb here, but there will be one. So just have in your horizon, scanning, in your scenario planning, have the exercise, how would you respond, especially if you're caught off guard and some ofac sanction comes in, a blocking wall comes on the back of it. How do you respond day one, and how do you position yourself? You need to figure that out now before someone ends up being the first pick.

Daniel Sternoff: So there could be problems for somebody in the future. Right now, for Hung Li, do you think this is going to dissuade them from dealing with Iranian oil, blocking sanctions notwithstanding?

Cory Combs: It's a very good question, I think. I mean, there are a lot of details with. I mean, Zhejiang Petrochemical has slightly different operations and operational capabilities than Hung Li. So we can get into detail, but broadly speaking, I expect Hong Li to adapt. The bigger issue for China is if the US Goes after all of the private mega refiners, or at least a bigger chunk of them. If it goes after Zhejiang Petrochemical, Hung Li and Rongshan, significantly, all at once, that fundamentally changes the game because a lot of what this is about, like the teapots, have been traditionally the kind of the sponge, as your listeners know very well, for the sanctioned crude. Hung Li and others operate in a more mixed space and they will protect themselves. They do need to operate in USD. But there are limits to how far the US activity can go before you start to see these impacts creep up and become more of a macro issue.

Daniel Sternoff: Okay, great. So let's turn to the Trump Xi summit. Obviously, Iran and the Strait of Hormuz are not the central issue because there are many, many issues on the table. But it's an important one, and for this podcast, it's the one that we focus on. The White House readout after the meeting, it stated that the two sides agreed that the Strait should remain open, and the White House said that Xi made clear China's opposition to militarization of the strait and for Iran to charge tolls, etc. It's pretty unusual for the US to characterize what she said rather than to actually hear it from China. And we did not hear those words in that way from China. So how do you read the handling of the issue overall?

Cory Combs: Absolutely. This is actually, you know, you're right, we'll focus on Hormuz in Iran, but generally there was a lot that was said by the US side that was not said by the Chinese side. Now, there are two angles here, two pieces here that are both relevant. On one hand, this is a typical problem, and this is not a political statement. This is a very practical issue. In almost every major negotiation between this Trump administration and China, there has been a significant gap between what the US readout says and what China says. Agreed to. This was most notable in the case of Busan, in really the many meetings leading up to Busan, at which ultimately we were able to see a relative detente. And China backed off on or postponed the implementation of threatened export controls that were announced October 9th in retaliation to the September 29th bis rules that would have basically ended up sanctioning a ton of Chinese companies. But the US readout made claims such that China had agreed to roll back other export controls that in no way or shape or form had that happened and has since been confirmed that China's readout was accurate. And both sides eventually agreed that that's what had been agreed. So this is not the first time this kind of gap has occurred. I will say, in this case, it's a little less dangerous. Last time it was very dangerous because markets react to what supply will I and won't I have in the next year. If you get that wrong, if the president of the US says the wrong thing there, that reshapes markets very directly. That was sorted, but it was very dangerous in this case. I think what's most important is that there's a genuine, credible commitment on both sides to stability. That includes with Iran, that includes with Hormuz. There are probably going to be continued differences about exactly what that looks like in practice, but both sides have generally agreed to bilateral stability or at least a floor under the relationship, stability in the region and stability of trade. And so within that, I would expect two things. One is that Beijing is, if not in the letter, at least in the spirit of what the White House is saying. I think there is alignment. I think it is consistent with the spirit that Beijing has been indicating through other policy discussions domestically, et cetera. I would also expect that they are trying not to catalyze certain agreements or crystallize, excuse me, crystallize certain agreements yet to give themselves more space for discussions. We know for a fact a lot of this meeting, a lot of what happened in these meetings was very rushed. Right. Iran has been taking a lot of the White House's attention. I was, you know, we'd said before the summit that we don't expect a grand bargain for ERZ or anything else, because there wasn't time. I mean, the summit was known to be happening, but the actual negotiations had not been. You know, at least there was no evidence that they had moved far enough to have a final signed document. President Trump may be willing to negotiate on the fly. President Xi is not that China was never going to agree to something that hadn't been through 20 levels of bureaucracy. And so in one hand, you could imagine that Beijing more or less did say versions of what Trump had said, but is waiting for further negotiation, further agreement to get to the details before they crystallize that as policy. So that's entirely possible in this case.

Daniel Sternoff: Right. Do you think this commitment to stability in the relationship. So, you know, in addition to the oil sanctions that we recently saw coming out of Treasury, Scott Besant had threatened to put sanctions on two Chinese banks. We don't know exactly which banks they were, but he had kind of thrown it out there. And I think the, you know, the impression was he's trying to say to China, you know, cool it on the Iran oil or else we escalate. Do you think that a move like that is off the table now under this commitment to stability, or that's still a space that the US could, could go to?

Cory Combs: There's two different questions. There's what I would say strategically, and then what might actually happen politically, I would say strategically, it is absolutely not in, in the US's interest to escalate this. The threat of secondary sanctions makes sense as a negotiating tactic. Right. If you're looking at it tactically, if you're very much, you want to be credible in threatening China, if you're coming from the White House's perspective and trying to get them to roll down sanctioned oil purchases, et cetera, et cetera. But if you really go, I think this is where it really matters to understand why Hung Li is fundamentally different in China's industrial economy and financial economy, where the banks there involved in that are separate in the financial economy from everything involved in the teapots. If the US thinks that this is something that China can just live with, it can afford to throw its weight around, it can afford to threaten and try to build leverage, it would be mistaken. And it would be mistaken specifically for the reasons we already talked about. But what would happen is not only would you probably not like, if you actually start sanctioning these particular Chinese banks that have USD exposure, I do not think for a minute that Beijing would roll back. In fact, you'd probably lose all of what Beijing has been supporting and getting Tehran to the table, getting them to discuss. Not that that has solved the war at this point, but it would be a lot harder without China. And China has a lot of leverage in terms of, fine, do it yourself, we're not going to help. That is the worst case. And I think you only understand that that is a real possibility. If you understand how impactful Hung Li and These banks are for China right now. If you think of them as teapots, your strategy is going to be misplaced. That's my take right now. At the same time, I mean it is also difficult with, in negotiation, of course everyone's trying to maximize the leverage and frankly, when you keep making threats and don't follow through, your leverage does eventually erode. But in this case, I would strongly, strongly say that not actually following through is very much in not only everyone's interest, but specifically the US interest at this point is my view.

Daniel Sternoff: So let's turn away from these sanctions questions to some of the broader impacts on China. From the energy disruptions through Hormuz, we've seen imports of crude oil and petrochemical feedstocks, they tumbled really sharply. You know, there's a perception that China is better insulated than most economies in the APEC region. Obviously electrified power system, lots of coal, big inventories of, of oil, low oil intensity to GDP, etc. But it's still a really big disruption. Oh yeah. And so, so how are you seeing the broader industrial impacts? Who is being affected and how? And how is this rippling through the industrial economy?

Cory Combs: Yeah, I think there are two fascinating pieces here. One has been really well covered and I actually turn to people like Erica Downs, I think doing incredible work on a lot of this. So just specific shout out to all my favorite people in the space there. But there's the how is China managing or weathering the crisis side? And then another layer I'd like to talk through a little bit here which is how this is still a very bad situation. On that, just to be very clear, no one's winning. Some are just losing less badly. I would not personally characterize that as a win per se because everything's relative, but still. But the other piece here is how Beijing has actually been leveraging some of the exogenous shock to use as political cover for some long suffering domestic industrial policy objectives. And I think that's one piece that is really interesting to map out here. So if you don't mind, I can jump into a few pieces. I think there's probably four layers here. Is it okay if I jump into those? Great. So in terms of impacts, right. First off, we have PetroChina, CNPC, you know, the traded entity, they are really safe from a lot of the disruption because they have so much. They're the main offtaker of the Russian oil, both pipeline and seaborne. Right. So a lot of that flows through PetroChina and that's what's keeping a lot of Chinese transportation fuels that's what's keeping it running and that's the major piece where people rightly point to China's more insulated not just from the electrostate piece of it but the, you know PetroChina is getting other sanctioned oil that is not being priced at wartime prices and is not disrupted by Hormuz Right. So still a huge disruption but there is a level of protection there that most countries just don't have in the region at least then you have Sinopec I think Sinopec is a fascinating layer because on one hand they don't have the protection of the kind of security that PetroChina has they have a lot of exposure but what they have actually seen is we have seen after the central government in March initially rejected state owned enterprises request for access to the Strategic Petroleum Reserve right in April they allowed some and it turns out a specific piece of that Sinopec got a very nice carve out specifically allowing them to do two things at once One is to dominate a lot of the production of jet fuel and just as a bit of background China has imposed export controls to safeguard domestic industry this is not a weaponized control this is very much protect domestic industry control on gasoline, diesel and with a huge caveat, jet fuels and the caveats are not for instance this doesn't apply to international flights or Macau and Hong Kong but the rest of the world is still kind of cut off because of the feedstock issue and so Sinopec has been able to with access to the SPR now Beijing has been able to select who exactly is able to capitalize on the high cost of those fuels and specifically Sinopec has gotten a large piece of that pie the other thing is that again only Sinopec and the mega refiners like Hung Li have the ability to switch between are they producing, are they refining transportation fuels or petrochemicals, polymers, olefins, things like that? Right. The teapots can't really do that certainly not easily and not in a short time frame Sinopec and Hung Li and Rongsheng, they can do that and so we've seen both Sinopec and Hung Li with less SPR access specifically eat up some of the market for petrochemicals not transportation fuels that basically not only are they getting high premiums in the short term the revenues are about to flip back to the positive there in terms of growth but we're also seeing them basically take up market share while the rest of the world's petrochemical production is, is suffering from feedstock issues. Beijing has specifically opened the SPR to enable increasing market share in the chemical space, which I find is just really an incredibly important piece of this. Hungli and everything, I think we've talked about that with the teapots are the last interesting piece of this. The teapots had been again, the sponge, as everyone I think well knows at this point, for sanctioned crude. But there's also been this back and forth that I know you all know well. But for certain listeners who might not be following this day today, one of the issues is that Beijing, the central government, has been wanting to consolidate the teapots for ages. There's a huge overcapacity issues and part of the political issue, and this really does matter when it comes to fights between the ndrc, the Macro Planner National Development Reform Commission and the local governments. One of the issues is that for local governments, they are a huge portion of the tax base. And so even if they're relatively unprofitable in general as a group, that whole group of hundreds and hundreds of independent refiners, they're essential to Shandong's economy. And so it's really hard to force them offline. It's really hard to force consolidation politically in the political economy sense. But right now they're being forced offline anyway. I mean, this disruption is. Beijing doesn't have to be the bad guy here and cut them off. It's just being cut off. And oh no, what if we just don't help them? And what if we allow that consolidation to be accelerated a little bit? So it's not. I don't want to say, you know, this is the end of the capacity, not in the slightest. But I think what's fascinating is Beijing has clearly has the option to help here and is very specifically allowing this exogenous shock to give political cover to accelerate the consolidation that it's been seeking for a long time.

Daniel Sternoff: Right. That's an excellent point. And I imagine that if this disruption continues for a long time, then that that window will. Will be open. Corey, I would love to dig into many of these issues more deeply and others, but I think we are out of time. So I really appreciate your joining us today. Your insights are really appreciated. Thanks a lot.

Cory Combs: Cheers. A pleasure to be on and continue the great work you guys are doing. Really love referring clients and everyone else to your expertise and the work you put out is fantastic. So again, pleasure to be on and we'll keep following us closely. Cheers.

Daniel Sternoff: Wonderful thanks. That's it for this episode of Iran Conflict Brief, a limited series from the Columbia Energy Exchange Podcast. Thank you again, Corey Combs, and thank you for listening. The show is brought to you by the center on Global Energy Policy at the Columbia University School of International and Public Affairs. I'm Daniel Sternoff. This podcast was produced by Mary Catherine o', Connor, Caroline Pittman, and Q. Lee. Greg Villefrank engineered it. For more information about the show or the center on Global Energy Policy, visit us online @energypolicy columbia.edu or follow us on social media. Olumbiauenergy if you like this episode, leave us a rating on Apple, Spotify, or wherever you get your podcasts. You can also share it with a friend or colleague to help us reach more listeners. If you have any questions, comments or feedback, we'd love to hear from you. Email us@columbiaenergyexchangemail.com thanks for listening.