Geopolitics, Energy, and This Moment – The Next Oil Shock?

Geopolitics, Energy, and This Moment – The Next Oil Shock?

by Stephen V. Arbogast

This Moment is surprisingly serene.  Navigating the interregnum from a surprisingly peaceful U.S. presidential election to the inauguration of Donald Trump, the Moment seems more calm than turbulent.  True, violence continues in the Middle East and Ukraine, and there was a horrible terrorist incident in New Orleans.  Wildfires are again scourging California.  Still, in comparison to 2020’s Covid shock, 2021’s Russian invasion of Ukraine, and 2022-23 wars across Israel, Gaza, Iran, Yemen, Lebanon and Syria, these early 2025 days are tranquil.  Perhaps that makes this a good Moment to look deeper into the conflicts still raging and peer a bit into the crystal ball.  What we see there suggests the potential forming for the next energy shock.

This Deceptive Moment: Several case-specific factors account for much of the current calm.  In the Ukraine, it’s winter which brings a lull in fighting.  In Gaza, Syria and Lebanon, severe blows were struck in 2024.  All parties are now assessing gains and losses. Israel looks like the biggest winner so far.  The anti-Israel frontline forces have been severely damaged, and their Iranian patron is licking its wounds.  The mullahs must also reckon with a message delivered by an Israeli air force that decimated its air defenses and munitions plants, and with the collapse of its Assad-led Syrian client state.  In America, the two political parties, various ‘influencers’ and the mainstream media are parsing their shock that Donald Trump was given a mandate that included big slugs of constituencies once thought eternally Democratic.  Across Canada and Europe, exhausted center-left parties stagger to their almost-certain electoral dismissal.  As for China, its sphere is also quiet.  Meanwhile, its unelected but unquestioned leader, Xi Jinping, wrestles with an economy no longer hitting on all cylinders and a set of trading partners thoroughly disillusioned with having their industries hollowed out by a Chinese combo of low-cost production, hard work, managerial competence, intellectual property theft, and state subsidies.

Like highly reactive chemicals sitting on a shelf, this geopolitical scene remains volatile.  For the Moment, it awaits Donald Trump taking the oath of office.  Then the players can begin finding out which of the new President’s unsettling campaign promises are for real and which are for bargaining.  As that process unfolds, the geopolitical tectonic plates will again begin rubbing and rupturing.

The Triangular Frontier of Conflict: Ukraine, Israel/Iran, Taiwan.  These locations, separated by thousands of miles, oceans, and radically different cultures, constitute a geopolitical ‘frontier of conflict.’  Missiles, bombs and bullets are being exchanged in two of the three locations.  Both Ukraine and Israel are giving lessons in the new nature of warfare.  China cannot but be watching intently.  Some years ago, President Xi ordered his military to be ready to ‘take Taiwan’ by 2027.  There were reports in 2024 that he replaced several senior military figures.  These reports were accompanied by intimations that those who were dismissed had expressed doubts about the feasibility of invading Taiwan.

What were these Chinese generals seeing in Ukraine and the Middle East that intensified their sense of risk?  Without question, they saw the ‘zero sum’ nature of modern warfare where precision weaponry and cheap delivery systems can render the battlefield a cemetery for the offensive styles of yesteryear.  In 2022, Russian President Putin sent his elite forces toward Kiev with an expectation that Ukraine would fall in a matter of weeks, if not days.  Those forces were crushed.  Smart anti-armor weapons and precision guided artillery turned Russia’s ‘lightening war’ into a 1917-style war of trenches and attrition.  Ukraine thought it could go on the offensive in 2023.  It’s troops and tanks, including the best models Germany could furnish, never made it through the mine fields.  Since then, the nature of battle has evolved to where battlefield commanders can direct individual soldiers to release precision-armed hand-held drones that wreak havoc on attacking forces and armor.  Both sides now slug it out, suffering tons of casualties for advances of a few miles and sometimes only a few yards.

Israel’s response to the Hamas terror raid of October 2023 shows the other side of modern warfare’s coin.  Superior intelligence and a great edge in advanced military technology can produce dramatic, one-sided results.  Hezbollah’s leadership was largely decapitated by exploding pagers developed and planted by the Israelis.  Iranian missiles launched at Israel were intercepted almost entirely by American-made air defense systems.  Meanwhile, Iran’s Russian-made air defenses were completely neutralized by the Israeli air force, leaving Iran essentially defenseless should Israel choose to follow up.

Here at least are two lessons to behold: 1) Miscalculating the prospects for military success can lead to stalemate, huge casualties and highly uncertain outcomes; and 2) Something like total victory/defeat is still possible, depending on who has decisive capabilities for blinding and disarming an opponent.

It is then reasonable to ask what implications these lessons hold for President Xi and China as they consider Taiwan and the 2027 deadline.

Blockade rather than Invasion is Now the More Likely Chinese Strategy for Absorbing Taiwan

 At its narrowest point, the Taiwan Straits are more than 100 miles wide.  Launching and sustaining an amphibious assault across such open waters would be challenging under 1944 circumstances.  To consider such an assault in this age of precision weaponry, one would have to be assured of at first blinding and decapitating the Taiwanese.  This calculus gets even harder if the possibilities of engagement with U.S. and allied naval and air forces, including submarines, must be added to the war gaming.  Moreover, the Chinese mission involves more than just getting its forces ashore.  They must then be resupplied and reinforced for the time needed to conquer a hostile military and population operating in its own, familiar and mountainous terrain.  Communist China has never undertaken such a venture.  In fact, its military hasn’t fought anyone since an inconclusive engagement with Vietnam in the 1970s.  It’s shiny new navy, impressive on paper, has never fought anyone.

All these risks have been reinforced by the lessons flowing out of Ukraine and the Middle East.  Alongside its aid to Russia, China’s generals have been following events in the Ukraine closely. Setting public bluster aside, the qualms of those generals suggest they feel less than confident that China can blind and render defenseless Taiwan and its U.S. and allied supporters.  Weighing in from another direction is President Xi’s need to make ‘good’ on his repeated commitments to incorporate Taiwan into China by one means or another.  As China falters economically and Xi watches how its actions are increasingly isolating it diplomatically, Xi’s need for a signal achievement looms larger.  The odds then grow that Xi’ will seek a path out of this dilemma by recourse to an ancient Chinese tradition – to win without fighting by demoralizing one’s target by other means.

As an island economy, Taiwan is vulnerable to blockade.  Take energy as one example.  As of 2022, the island had stockpiles of only 11 days for natural gas and 39 days for coal (oil was a little better at 100+ days).  Taiwan’s grid depends heavily on both coal and gas; could they keep the lights on if blockaded?  What about food?  Taiwan imports 70% of its consumption.  It does have considerable stocks of rice and has the potential to produce more domestically, but most other food sources would be depleted quickly.  Given these facts it is fair to ask if Taiwan would be willing to suffer a successful blockage?

Another part of Chinese ‘non-war’ doctrine involves conducting wars of nerves to demoralize opponents.  Examples of such tactics are already visible.  Here we can recall the missiles China launched into waters around Taiwan to ‘protest’ the visit of House Speaker Nancy Pelosi.  Chinese violations of Taiwan airspace are now routine.  Ditto for cyberattacks and harassment of vessels by the Chinese Coast Guard.  These actions don’t just serve to pressure and unnerve Taiwan’s leaders.  They are meant to signal the U.S. and allies regarding how easy it would be for China to enforce a blockade of Taiwan.

These tactical options also message that China has at its disposal stages of escalation short of all-out blockade.  Declaring a blockade may be deemed an ‘Act of War’ by the U.S., Japan and others.  This would bring a risk of all-out naval and air combat.  Before proceeding to such a stage, China is likely to intensify its harassment activities.  Doing everything it can to disrupt Taiwan’s trade-dependent and high-tech economy might demoralize its leaders and population; it might also make a negotiated ‘one state-two systems’ arrangement seem more attractive (despite how that worked out for Hong Kong).

If such tactics fail to push Taiwan into China’s arms, the next stage would be a ‘quarantine.’  Without declaring a formal blockade, China could simply begin intercepting and disrupting all trade with the island.  China considers the South China Sea its territorial waters.  It could cite this fact and whatever bogus other justifications at hand to force ships to undergo inspections, replace crews and whatever other supposedly ‘legal’ disruptions they could dream up.

These tactical options present nightmare scenarios for American war planners.  There are many scenarios to consider, and Taiwan is blockade vulnerable.  Moreover, America’s big ship navy is considered vulnerable to Chinese ground-to-vessel missiles.  Fighting through a blockade if necessary to resupply Taiwan must look very daunting down in the bowels of the Pentagon.

Which brings us to the energy component of this story.

Proportional Response with Crude Oil as the Lever

Facing a potential of staged escalation towards a blockade of Taiwan, the U.S. and its allies are considering how they can assist that island if such an eventuality comes to pass.  Some of this planning undoubtedly involves strategies for resupply.  However, most resupply scenarios involve a risk of direct conflict with China.  Should the Xi regime decree a ‘no entry’ zone around Taiwan or just create one de-facto via missile and other attacks, the U.S. will have to decide if it wants to risk losing ships.   Assuming vessels are attacked, it might then have to respond to the loss of American lives.

A potentially attractive alternative would be to consider actions that might deter China from acting in the first place.  This alternative involves ‘Proportional Response Counter-blockade’ and the principal item to be curtailed would be China’s petroleum imports.

The Proportional Response aspect of this strategy involves matching Chinese saber rattling with actions that threaten worse to come if China escalates.  The idea here is to respond to Chinese threats with counter-threats of similar magnitude, leaving the Xi regime to ponder whether continuing up the escalation ladder will do more harm than good.  A Counter-blockade of oil supplies would be well suited for this mission.  It would pose an existential threat to China’s economy while offering various degrees of severity that provide tactical flexibility.

Some essential facts are needed to understand this option.  At present, China consumes slightly more than 16 million barrels per day (MB/D) of crude oil.  Of this amount, approximately 11 MB/D is imported.  In 2023 China’s top ten suppliers of imported crude oil were:

Leaving aside U.S. volumes, the majority of these supplies pass through two choke points, the Straits of Hormuz between Iran and the UAE and Oman, and the Malacca Straits between Singapore and Indonesia.  Some 40-50% of all Chinese oil imports pass through Hormuz and ~80% move via the Straits of Malacca. About one-third of the Russian volumes also pass via the Malacca passageway.

A U.S. and allied naval blockade focused on these choke points offers numerous advantages.  It would allow for relatively easy checking and identification of tankers bound for China.  Those headed for China can be denied passage on pain of being boarded and seized.  Those seeking to evade via a more southern route would be intercepted by surface vessels deployed in the area south of the South China Sea.  Locating a blockade in these regions situates it in waters adjoining states mostly friendly to the U.S.  It also means that any Chinese inclination to confront the U.S. Navy would force them to operate far from home waters.  The Chinese navy has not trained extensively for combat far from home.  Its ability or desire to confront the U.S. Navy outside the South China Sea can be questioned.

Naval interdiction at Hormuz would be aimed at identifying supplies likely headed for the China market.  Much of the world’s oil supplies pass through this waterway, including a predominance of shipments supplying South Asia and the Far East.  Since many Mideast cargoes are rerouted once on the open seas, attempting to identify and forestall cargoes headed for China only at Hormuz would be problematic.  Simply identifying candidates for interdiction at Malacca seems more feasible.  Efforts at Hormuz and Malacca would be aided by receiving crude oil purchasing intelligence from friendly Gulf states, i.e., Saudi Arabia, Kuwait, Oman and the UAE.  In a Taiwan crisis, the Hormuz chokepoint would also be used to prevent any supplies from the current Iranian regime from reaching Indian Ocean open waters

While a physical blockade forms the ultimate sanction, China’s oil import dependence offers multiple opportunities to match its saber rattling towards Taiwan.  Here in ascending order of severity are examples of staged measures to communicate oil supply risk to President Xi:

1. Persian Gulf producers can instruct load port personnel to process China-bound ships more slowly and subject them to more rigorous customs and safety inspections
2. Major Gulf countries supplying China can signal reluctance to sign new contracts
3. S. Navy can mobilize and concentrate interdiction vessels near Hormuz and Malacca
4. The U.K./U.S. maritime insurance markets can refuse to cover vessels bound for Chinese ports
5. Companies whose tankers call at Chinese ports can be cut off from the $US bank clearing system
6. Persian Gulf suppliers can announce they are embargoing China, and that they will similarly embargo any third country that seeks to transship supplies into China

This list hardly exhausts the measures available to signal that a blockade could follow.  With all that said, there is still the question of whether the ultimate step, blockade, would prove effective.  The answers here are complex; both the arguments for effectiveness and the difficulties deserve enumeration.

Will an Oil Blockade Actually Work?  Will it be Oil Only?

The potential value of a petroleum Counter-blockade must be weighed in the light of several obstacles.  A short list of the most prominent complications appears below:

• China has substantial strategic petroleum reserves which will delay any blockade’s effects
• Blockades tend to leak, as China would find ways to import or smuggle in both crude oil and refined products from countries interested in profiting from the episode. India would be a prime ‘leakage’ candidate; having them onside before a blockade starts would be important
• Identification may fail in part, enabling some tankers to make it into Chinese ports
• China can conserve supplies by rationing and other quasi-war footing measures
• The U.S. and allies will have to be prepared to physically enforce the blockade, including but not limited to boarding or disabling non-compliant tankers and confronting Chinese navy ships should these choose to convoy tankers

Some facts are relevant to this discussion.  Best estimates suggest China has about 700 MB of strategic petroleum stocks.  Just short of 500 MB constitute government-strategic reserves with the remaining being petroleum company reserves.  The combined reserves constitute about 63 days’ worth of 11 MB/D of imported supplies.  If we assume some 2 MB/D makes it through a blockade, e.g. Russian supplies that don’t traverse Hormuz or Malacca, the reserves go up to 78 days of supply.  If a full embargo/blockade only succeeds in stopping 7.8 MB/D of imports, China would have 90 days of strategic reserves.  There are many uncertainties surrounding these estimates, e.g., how much leakage would the blockade incur, is China prepared to go to zero reserves, are all reserves readily available when tank bottoms and logistics are considered?

Nonetheless, a petroleum blockade supported by the Persian Gulf producers would deeply threaten the Chinese economy.  Its leaders, planners and military would have to contend with their massive economy running out of fuel within four months.  Moreover, a U.S. petroleum Counter-blockade would reposition Chinese coastal waters, the Taiwan Straits and the South China sea as war zones.  China’s economy, based as it is on industrial production and maritime foreign trade, would be suffer severely from Day one.  Would suppliers of food and other raw materials still enter a China maritime war zone?  Will China’s export customers want to see their cargoes running war risks?  Will they not instead look for alternate sources of supply, seeing as all China trade may be disrupted for an indeterminate amount of time?  It is not a stretch to say that, if Taiwan fails to surrender quickly, a determined Counter-blockade would pose a sobering ‘bet the economy’ risk for the Xi regime.

Would the U.S. be willing to impose a petroleum blockade?  Here the costs for America of an all-out trade war with China must be weighed.  Certainly, there would be impacts.  Consumer goods, everything from pots and pans to I-phones would be disrupted.  Some strategic materials, e.g., rare earths and smelted metals, would be cut off; batteries and solar panels would be impacted.  These disruptions also would impact prices. An inflation spike can be anticipated.  President Xi knows this very well.  One can surmise that China’s interest in driving for dominance of industries like batteries and rare earths was aimed in part at securing leverage to offset its oil vulnerability.  Several of its ‘Belt and Road’ projects, e.g., the China-Myanmar Oil/Gas pipelines, had a similar objective.

Finally, China may deem an oil blockade to be an ’Act of War’ and choose to engage militarily.  Perhaps their response would start proportionately, i.e., at a scale commensurate with whatever naval activity the U.S. was undertaking.  From there the risks of escalation, potentially all the way to the nuclear threshold, would loom.

Given these likely costs, would a future U.S. administration be willing to risk imposing a petroleum blockade?  This will only be answered by the responsible leaders when/if a Taiwan threat scenario were to unfold – but in anticipation of this contingency, the following considerations are offered.

Factors to Consider in the Calculus of Deterrence and the Consequences if Deterrence Fails

The first factor to consider is the relative damage that a successful U.S./allied blockade would inflict on China compared with the collateral damage suffered by the U.S. economy.  As indicated, the damage to the Chinese economy would be existential.  Not only would it face large parts of the economy shutting down within months; in choosing to blockade Taiwan, it would also damage its status as a reliable trade partner. That damage would last years and might never be undone.  For the U.S. and its allies, there would be disruptions and some inflation.  Revised routes for supplying Japan and Korea would have to be worked out. Interestingly, the U.S. and allies would not incur oil price inflation.  With China embargoed, global supplies would be in surplus, and oil prices would slump.  Conclusion – an oil blockade and subsequent trade disruptions would be enormously painful for China versus uncomfortable but bearable for the U.S. and its allies.

The second factor concerns what a U.S./Allied petroleum blockade would mean for Taiwan’s willingness to resist.  As noted, historic Chinese war doctrine follows Sun Tzu principles.  His ‘Spectrum of Warfare’ eschews ‘the Big Battle’ (i.e. direct ground warfare) and instead suggests economic, psychological, trade, etc., alternatives.  Such ‘alternative warfare’ prioritizes winning by demoralizing opponents rather than by fighting.  By blockading Taiwan or engaging in the preliminary saber-rattling stages cited earlier, China would seek to win through demoralization.

The process of demoralization works by convincing the target that it cannot win in the long run; hence, the target concludes it is better to submit early and secure the best terms it can.  Without facing something like a Counter-blockade, China’s demoralization tactics have a good chance of prevailing.  What exactly is Taiwan to hope for as its supplies and stocks dwindle and its trading economy goes into shock?  Would they really count on being rescued by a U.S. naval/airlift reminiscent of Berlin 1948?

The Counter-blockade gives Taiwan another path to prevailing.  Just the threat of a serious Counter-blockade could present China’s war planners with such threatening risk scenarios as to deter China from moving against Taiwan.  Moreover, implementing a Counter-blockade can work in conjunction with the U.S. organizing relief supplies into Taiwan.  The Counter-blockade starts a clock ticking on shutting down parts of China’s economy.  Funneling supplies into Taiwan, either surreptitiously or by successfully testing China’s blockade, extends that island’s ability to wait for the Chinese economy to seize up. Together they convey mounting risk to China that time is not on its side.

Continuing the focus on deterrence, there would be value in undertaking visible preparations for a Counter-blockade.  There are many actions which would signal U.S./Allied determination in this regard.  Naval forces can be concentrated at Hormuz and Malacca.  Exercises can be run.  The stopping and boarding of ships can be practiced.  Preparatory conversations with Gulf State suppliers can take place through diplomatic channels.  Japan and South Korea can beef up their reserve stocks in anticipation of temporary disruptions, and alternative supply channels can be game planned.  These and similar steps would warn China that it should count on being embargoed if it moves against Taiwan.

Some may argue that such actions would warn China, allowing it to anticipate and prepare.  However, China has already demonstrated it is aware of its vulnerability. As noted above, China is doing a lot to hedge its oil supply risk.  Perhaps if China saw the U.S. readying for a blockade, it could do a bit more. That said, China has an 11 MB/D oil import underpinning to its economy, and all its mitigation efforts to date have at most caused this requirement to plateau.  With the easier steps already taken, it is not clear that China can suppress its thirst for oil much more than it has.

A last factor has to do with authoritarian regimes and the types of wins they seek.  There is much historical evidence that dictators seek ‘easy’ wins to buttress prestige and intimidate internal foes.  A close reading of Hitler’s actions leading up to war shows that in each case he did not expect England and France to fight.  Moving into the Rhineland, incorporating Austria, annexing Sudetenland and then the rest of Czechoslovakia – in each instance he told his doubting military that war would not come.  Even when moving against Poland, Hitler is reported to have been surprised that the British Prime Minister stood by his guarantee and declared war.  During this same period, whom did Mussolini pick on? – Abyssinia and Albania.  In 1948 did Stalin send the Red Army to seize Berlin?  No, he tried to blockade it and stood down when that failed.  Khruschev thought he could sneak missiles into Cuba and present the U.S. with a fait accompli; he too stood down when that failed, and it cost him his job one year later.

The benefit of making visible preparations for a Counter-blockade is that it will weaken any Chinese thought that taking Taiwan will bring easy victory.  The cross-Straits invasion now looks chancy.  Raising the risks of a Taiwan blockade can then dispel any notion that a second pathway exists to an easy win.

This connects to a final factor, that the aging of leaders is an Achilles heel for authoritarian regimes.  Most authoritarian leaders understand that they will only leave office feet first.  The only question is whether that leaving will happen due to natural or unnatural causes.  If the leader manages to hang on to an advanced age, caution tends to seep in from multiple directions.  Xi Jinping in now 71 and well into his second decade running China.  Will he be more of a risk-taker at 73 or 75 or 77?

A Final Word

The historical precedents argue against Xi growing bolder, but there is no way of knowing if this will hold in Xi’s case.  What can be known is the nature and visibility of the risks Xi will run if he decides to force the issue on Taiwan.  Making these risks as visible and intimidating as possible seems the best way to reinforce the natural caution that Xi may experience as he ages.

That said, there is also a case for caution on another front – that of pushing a trade war with China too far.  The exception to the ‘dictators seek easy wins’ history is Japan.  Its 1930s aggressions took place when it saw the U.S. mired in isolationism and the European colonial power fully absorbed by threats near home.  However, Japan only decided to move against the U.S. when the Roosevelt administration embargoed steel and oil.  Faced with what it deemed to be a mortal economic threat, Japan decided to roll the dice and go for a raw materials empire.  It would take a lot of ‘de-linking’ with China on trade to come close to the threat level Roosevelt imposed on Japan’s economy.  However, leaving Xi and possible successors with an impression that China still benefits overall from global trade and that it has a stake in preserving conditions conducive to it seems a useful corollary to the Counter-blockade measures that support Taiwan.  For it is the benefits of global trade that will be one of the biggest costs China will incur if it moves against Taiwan, only to discover that no easy win is in the cards.

Finally, no one should gainsay that the Counter-blockade scenario will not pose serious disruptions for the U.S., East Asian economies other than China and the Persian Gulf producers.  Supply routes would be disrupted and need to be reconfigured in a manner reminiscent of long-ago embargoes.  Oil prices would first soar and then likely plummet. Blockade enforcement would be difficult and risky.  Yet, it is the determination to carry through with a Counter-blockade, knowing that these difficulties must be faced, that will give that response its deterrent power.  Making the right preparations now will both signal that determination and smooth the blockade’s implementation should its need come to pass.