As the war in Iran enters its second month, global oil prices have surged sharply. Brent crude has crossed $100 per barrel, raising concerns worldwide. However, China has managed to protect its economy from major disruption. One key reason is its network of small, independent oil refineries, known as “teapot” refineries, mainly located in Shandong province.

Small Refineries Play a Big Role

These teapot refineries are privately owned and smaller than major state-run facilities. Despite their size, they account for nearly 25 percent of China’s total refining capacity. They are called “teapots” because of their compact, teapot-like structure. Unlike large companies such as Sinopec, these refineries mainly operate within China’s domestic market. This allows them to avoid strict global financial scrutiny.

Buying Cheap Oil from Sanctioned Countries

Teapot refineries freely purchase discounted crude oil from countries like Iran and Russia. Larger state-owned firms avoid such deals due to fear of US sanctions. In fact, US sanctions have indirectly helped Iran, Russia, and Venezuela become major oil suppliers to China. These smaller refineries act as buyers of “riskier” oil that others refuse to touch.

China Built Strong Oil Reserves

China prepared for such a crisis well in advance. Before the war began on February 28, it had already built large oil reserves. Estimates suggest China holds about 1.2 billion barrels of crude oil. Much of this stock was bought at lower prices from sanctioned producers. This reserve can cover around 109 days of imports by sea. This strategy has helped China handle supply shocks better than many other countries.

Teapots Act as Crisis Buffer

Teapot refineries played a major role in building these reserves. They absorbed large amounts of cheap oil from Iran and Russia when prices were low. “In normal times, they boost fuel supply and margins. During crises, they act as a flexible buffer for bargain barrels. However, when discounts dry up and prices surge, their thin profit margins get squeezed, forcing some to cut operations,” said Alicia Garcia-Herrero.

Pressure Builds as Discounts Shrink

Now, the situation is becoming difficult for these refineries. Earlier, Iranian oil was about $11 cheaper per barrel than Brent crude. But that discount has now dropped to nearly $2. At the same time, global oil prices have surged. This has sharply reduced profit margins for teapot refineries, which already operate on very thin margins. Reports suggest some refineries are slowing down operations due to rising costs and weaker demand.

Local Supply Remains Stable for Now

For now, fuel supply in Shandong remains stable. This is mainly because refineries built up inventories earlier. “We built some inventories earlier, so the pressure is not that big for the near term,” one refinery executive said. Recent data shows that refinery operations were running at around 55 percent capacity, slightly higher than before.

Workers and Industry Begin to Feel Impact

The rising costs are already affecting workers. At some refineries, orders have dropped sharply. Employees are starting to feel uncertainty.

Experts warn that if oil prices continue to rise, some teapot refineries may shut down completely.

China’s Energy Buffer Faces Risk

China’s strategy has worked so far. It has used small refineries, discounted oil, and large reserves to manage the crisis. However, this system depends heavily on cheap oil. If prices stay high and discounts disappear, the buffer may weaken. Analysts say that losing these teapot refineries would create a gap in China’s energy system that may be difficult to replace.