China's Teapot Refineries Keep Economy Brewing – But Surging Crude Prices Leave Them Strained
The towns that form the bulwark of China's energy security can appear deceptively quiet during global crises. Trucks carrying oil trundle along wide-open highways with minimal traffic, while boarded-up shops in crumbling low-rise buildings hint at a long-forgotten local buzz. A ramshackle noodle shop serving hand-pulled ribbons of dough was empty at lunchtime, save for a few construction workers and a teacher watching videos on Douyin, the social media platform, with his meal.
However, the boss wasn't concerned about low footfall. Peak time was midnight, he explained, when nearby oil refinery workers finish their shifts and rush out of the gated factory complexes that employ thousands. This scene underscores the immense oil-refining industry in Shandong, a province in north-east China.
Independent Refineries Fuel Shandong's Industry
Unlike other parts of the country where large, state-owned companies dominate, Shandong's industry is powered by independent "teapot" refineries, named for their diminutive appearance. Operating on razor-thin margins, they survive by purchasing cheap crude wherever possible and converting it into petrol and diesel for neighbouring provinces. Shandong's teapots account for approximately a quarter of China's total refining capacity.
Oil refining has become crucial to China's economy as the rest of the world, especially Asia, grapples with an energy crisis. This crisis has led to school closures in Pakistan, a national emergency in the Philippines, and record-high oil prices. Although oil represents less than a fifth of China's energy mix, it remains vital, particularly for the transportation sector. The Shandong teapots, located in towns like Weifang, are now essential for maintaining China's economic stability.
Global Crisis and Iranian Oil Flows
The crisis was triggered by US-Israel strikes on Iran on 28 February, which unleashed chaos in the Middle East and prompted Tehran to effectively close the Strait of Hormuz, a vital waterway through which about a fifth of the world's oil and gas flows. Despite this, Iranian oil has continued to sail across the seas, overwhelmingly heading to China, which buys more than 80% of Iranian crude.
Figures from Kpler, a data intelligence company, show that China's imports of Iranian crude are running at about 1.6 million barrels a day, compared with 1.4 million barrels a day in 2025. Muyu Xu, a senior crude oil analyst at Kpler, stated: "We are not seeing any disruption to Iranian oil flows."
China's state-owned refiners are cautious about buying Iranian oil to avoid being cut off from the US dollar-based international financial system. In contrast, the teapots, which cater to a domestic market, have no such qualms. Erica Downs, a senior research scholar at the Center on Global Energy Policy at Columbia University, noted: "The Trump administration has sanctioned a handful of teapots ... but that was not changing the flow of Iranian barrels to China. Western sanctions have paved the way for Iran and Venezuela and Russia to become the biggest suppliers to China."
Local Impacts and Economic Strain
The boss of a small petrol station in Weifang, a thickset man in his 70s referred to as Uncle Wang, reported that local supplies of diesel and petrol had been stable since the war began, although rising prices had reduced his profits to "almost zero." He remarked: "It's not that [other countries] can't get oil, it's that they are too scared to buy it because [Donald] Trump won't let them. But China isn't afraid of him."
Now, with the global desperation for oil and the US easing sanctions on Iranian and Russian crude, the Shandong teapots are paying significantly more for their raw material. According to Kpler data, Iranian light crude was about $11 cheaper a barrel than Brent crude before the US-Israeli strikes. Now, the discount has shrunk to as little as $2 a barrel, while Brent prices have soared.
A worker at Luqing Petrochemical, one of Shandong's most prominent teapots, expressed nervousness about the war's impact. The 22-year-old, whose identity is withheld for protection, said: "Before the war, profits were OK. After the war started, because the crude oil prices went up so much ... clients started buying less." He works on the production line, turning crude oil into light plastics for everyday goods like shopping bags, and expects his monthly salary of 5,000 yuan (£545) to drop to about 4,000 yuan next month.
Luqing, which employs over 2,700 people, was sanctioned by the US last year for allegedly buying millions of barrels of Iranian oil. The worker revealed that in recent months, the company has pressured people to quit by cutting salaries and relocating them to difficult work sites. He fears more cuts if the war continues: "I'm quite worried about that because the benefits and treatment here are very good." Luqing did not respond to a request for comment.
Broader Economic Concerns and Government Intervention
Workers in Shandong are on the frontline of an economic shock that most ordinary people in China have so far been insulated from. On Monday, the government made a rare intervention into the retail fuel market, reducing a planned increase in pump prices of petrol and diesel by about 50%. This prompted drivers to flock to fill their tanks before costs rose.
However, the teapot refineries and their thousands of employees may not withstand the pressure. If prices continue to increase, some may go bust. Uncle Wang highlighted a longer-term threat: "War is short-term." He pointed to electric vehicles as a bigger domestic trend endangering his petrol station business, underscoring the multifaceted challenges facing China's energy sector.
