China’s energy security is quietly tied to one of the world’s most sanctioned regimes. Iranian crude oil, banned by most of the global market, has become a steady, discounted lifeline for hundreds of small Chinese refineries. Today, more than 90% of Iran’s oil exports go to China. That amounts to about 1.7 million barrels per day, making China not only Iran’s top customer but practically its only buyer.

This dependency has created a fragile system. The oil is sold at a discount, shipped covertly using tankers that travel without turning on their tracking systems, and paid for in Chinese currency. While the arrangement is lucrative for China’s smaller “teapot” refineries—most of which are located in Shandong province—it has also created a dangerous reliance on a single, high-risk source.

According to commodities data firm Kpler, the switch to Iranian crude began in earnest in 2022. Refineries made the switch in order to protect their thin profit margins. “Chinese refiners have become addicted to importing Iranian crude oil at cheap prices, which are subject to sanctions,” The Wall Street Journal reported on June 17. These refineries operate independently from China’s large state-owned energy companies, giving them more freedom to take risks.

How Much Does It Save China?

The financial incentive for China is strong. Iranian oil has consistently sold for less than legal alternatives. In 2023, it was as much as $11 cheaper per barrel than Oman Export Blend, a similar quality but non-sanctioned crude. Even today, the discount remains about $2 per barrel. Tom Reed, vice president for China crude at Argus Media, confirmed that while the discount has narrowed recently, it’s still significant enough to attract buyers.

“Iranian crude is about $2 cheaper than Oman crude oil,” Reed explained, adding that the price gap had been much larger when risks were lower. In a market where profit margins are slim and competition is fierce, those few dollars per barrel mean the difference between profit and loss.

This low-cost access gives Chinese refineries a unique advantage, but it also ties them to a supplier that operates under constant threat of military conflict and economic sanctions.

The Kharg Island Vulnerability

The weak point in this arrangement is Kharg Island, Iran’s primary oil export terminal located in the Persian Gulf. Almost all of Iran’s sanctioned crude leaves from there. If it were to be targeted in a military strike, Iranian oil exports could fall to nearly zero overnight.

The risk is no longer theoretical. After Israeli airstrikes killed several Iranian nuclear scientists in June, tensions in the region escalated rapidly. While Israel has not yet targeted Iran’s oil facilities, analysts say that could change.

“If Israel aims to change the Iranian regime, it will likely feel the temptation to cut off Tehran’s oil funding,” The Wall Street Journal wrote. Homayoun Falakshahi, a senior oil analyst at Kpler, warned that “there are clear targets that can be attacked very easily,” identifying Kharg Island as the top vulnerability.

China knows this. The Chinese government has condemned Israel’s strikes and warned that further escalation could cause widespread instability. “China is deeply worried about the potential serious consequences of these actions,” said Lin Jian, a spokesperson for China’s Foreign Ministry. He added, “China opposes any violation of Iran’s sovereignty, security, and territorial integrity.”

Can China Find a Replacement?

In the event of a supply cutoff, China would be forced to look elsewhere for oil. But doing so quickly would be expensive and complicated. Saudi Arabia and the UAE together have more than 4 million barrels per day in spare capacity. A Goldman Sachs analysis noted that during past oil crises, those producers were able to replace about 80% of lost barrels within six months.

Still, China’s private refineries would no longer enjoy bargain pricing. “For the first time in years, China’s private refiners would have to pay full price for a barrel of oil,” the Journal noted. That would hit profitability hard, especially for refineries that have relied on cheap oil to stay afloat.

In anticipation of future disruptions, China has been quietly building up its crude reserves. According to official data, China had a surplus of about 1.4 million barrels per day in May 2025. That marked the third consecutive month that crude imports and domestic production outpaced refinery processing. This surplus could act as a cushion, but it’s not a long-term solution.

“China has plenty of scope to lower imports and put downward pressure on prices,” said one energy analyst, explaining that stockpiles give Beijing some temporary flexibility. But the data also show that this surplus will only last a few months unless new supply is found.

China’s energy entanglement with Iran is not just economic. It is part of a broader $400 billion, 25-year strategic partnership that includes infrastructure development, defense cooperation, and military technology exchanges. The agreement, signed in 2021, ties the two nations together in ways that go beyond oil.

“China is a friend for hard times,” said Iran’s former Foreign Minister Javad Zarif when the deal was announced. “Signing the cooperation agreement will further strengthen the ties of the two nations.” The deal includes joint military exercises, cybersecurity collaboration, and intelligence sharing.

In early 2025, Western intelligence agencies reported that China had shipped 1,000 tons of sodium perchlorate—a key missile fuel ingredient—to Iran’s Bandar Abbas port. That delivery, combined with cyber cooperation, has raised alarms in Washington and Tel Aviv about the growing depth of this alliance.

Despite this, experts say the China-Iran relationship is built more on shared opposition to the United States than on genuine mutual interests. “This alliance will fall apart when the U.S. is not involved as a foe,” said one analyst. “China does not have a strong common cause with Iran—in fact, China is known for persecuting Muslims.”

If Iranian oil is cut off, the effects will be felt first and hardest in China. Refiners will scramble for new suppliers, prices will rise, and economic pressure will mount. Global oil markets may also spike in the short term, something the White House would prefer to avoid.

“Trump doesn’t want to see Americans paying higher gasoline prices at the pump,” the Journal noted, suggesting the U.S. may pressure Israel to avoid targeting Kharg Island directly.

But regardless of how this plays out, China’s deep dependence on discounted Iranian crude has become a major liability. What once looked like a clever economic shortcut may soon prove to be a costly strategic mistake.