What’s a Teapot Refinery?
There is much to say about the implications of this conflict in Iran and its effects on the price of crude oil and its many derivatives across the world. Continuing with the theme of how the conflict in Iran has disproportionately affected Asian countries — heaviest hit being those in Southeast Asia — there are some interesting mechanics as to how China and the CCP have hedged themselves against some, but not all, of the price spikes caused by the conflict.
Among them is a brilliant, yet shadowy tactic taking the form of smaller, privately owned oil refiners, mostly in the Shandong province, known as teapot refineries2.
Some backstory first. China buys over 80% of the light crude that Iran has exported since the reinstatement of American sanctions during Trump’s first term in 20183. They purchased an average of 1.38 million barrels per day (mbd) of Iranian crude in 2025, roughly 13.7% of the total 10.27 mbd that China imported by sea3. China is the largest importer of crude globally, and alongside heavily sanctioned Iran, they are also large buyers of Russian oil and the largest buyer of Venezuelan ultra-heavy crude3.
Now onto these teapot refineries. These small, privately owned refineries represent around 25% of China’s refining capacity nationally3. They are a useful political asset — flexible and small enough to be large buyers of sanctioned Russian and Iranian oil without the political ramifications that would follow if one of China’s state-owned oil companies were making those kinds of purchases2.
Moreover, because of the heavy sanctions placed on Russia and Iran, the list of available — and willing — buyers of their oil is a short one. These teapots can buy crude at a heavy discount compared to non-sanctioned OPEC crude. The spread between sanctioned and non-sanctioned oil prices (ICE Brent) can be as large as $10 per barrel, and sits firmly in the range of $8–10 cheaper on a delivered basis to China3.
In 2024 alone, Iran made $35.76 billion from oil exports, and China accounted for approximately 90% of those purchases — roughly $32.5 billion worth of Iranian crude4. Iran has very adeptly utilised shadow fleets to circumvent price caps and sanctions — older, usually uninsured, re-flagged tankers that go dark on tracking and perform ship-to-ship transfers to move crude that would otherwise be impossible to trade openly21.
China has largely, but not perfectly, insulated itself from the energy crisis brought about by the closure of the Strait of Hormuz, through which 20% of the world’s crude and natural gas passes2. These teapot refineries cannot endlessly purchase sanctioned oil to fill the trade deficit left by this conflict. They operate on razor-thin margins — refining is extremely capital-intensive and is extremely sensitive to changes in the price of a barrel of oil2.
Some tankers have been sparingly allowed through the Strait. Several Asian countries including Malaysia, China, and South Korea have been permitted passage a handful of times since mid-March2. The Iranians have also been transacting in renminbi — a key indicator of the strength of the Iran–China trade relationship.
These teapots, used in conjunction with China’s ability to prepare for the future, have also allowed the country to stockpile massive oil reserves — approximately 1.2 billion barrels at the start of 2026, bought well below the cost of non-sanctioned barrels, providing roughly 109 days of seaborne import cover2. Their purchases have continued well into the conflict as they continue to buy Russian oil as well.
China has not explicitly acknowledged these teapot refineries but has not done anything to get in their way either2. Their import infrastructure through these teapot middlemen gives China options, redundancy, and plausible deniability politically — certainly part of a broader strategy to continue becoming a global energy hegemon.
The entire world is implicated in this conflict. Per my last article, those in Southeast Asia are particularly exposed. But among them, China is an outlier — and will remain one.