China quietly saved the world last month

- So you remember at the start of the Iran war,

everyone said there was this oil shock coming

that was going to basically blow up the whole world.

- World fears an oil shock.

- Oil shock. - Oil shock.

- Global oil shock is raising alarm.

- This has the potential

to be the biggest oil shock in history.

- All the flights were going to get grounded.

- Airlines are saying expect flight cancellation.

- They are canceling flights.

- 13,000 flights have been canceled.

- Cities were going to go dark.

- The final vessel carrying jet fuel

into the United Kingdom's going to get here in 48 hours

and there's no more after that.

- Gas was going to triple in price

if you could get any at all.

- Situation's looking pretty dire.

- Gas prices are expected to go up again.

- It would take months to recover it.

- This is just hard math.

The world's oil was going to dry up and that would be that.

- How we emerge from this crisis

will define us for a generation.

- And then it just kind of never happened.

- Oil futures, they're telling you in August

actually prices are coming down.

- Markets seem to be showing far less alarm than they did

at the start of the conflict.

- And it's not like the predictions turned out

to be based on some mistake.

You can go back and check their math.

It's right.

The world should have ended like four weeks ago.

No, something happened that no one expected,

that no one though was even possible.

The world got a savior

and it was the last person that you would guess.

Yes, it was the general secretary himself,

the party chairman, Chinese President Xi Jinping.

And if you're thinking,

"Okay, why didn't I hear about this?"

It's because China pulled it off basically in secret,

which is kind of a weird way

for an aspiring superpower to save the world.

And it gets even weirder

because the country they saved most of all

is their chief rival, the United States.

Well, today we are going to pull back the curtain

on how China saved the world from the Iran oil shock.

We're going to start by piecing together what China did

that saved the world since it happened in secret.

We're going to unravel how China did it

because this should simply

not have been possible to pull off,

which will help us to answer why China did it,

the theories for what was behind all this.

And finally, we are going to look

at what this changes in our global economic order.

This is a crazy one, guys.

This story is crazy.

So let's get into it.

Okay, so to understand what China did,

we're going to use the board to map out

the global oil economy,

what happened to it from the Iran War,

and then what China did

to save it from completely imploding.

Good?

So the main thing about oil

is it's traded in one unified global market.

That means all the world's producers

sell into the same big supply of oil

which the world's consumers all buy from.

And this is why when something happens

in any part of the oil world,

like say a war in the Middle East, it affects everyone.

And on any given day,

there are about a hundred million barrels

moving through this system.

100 million barrels produced every day,

and that is also 100 million barrels

that gets consumed every day.

And it's really important that these two numbers

are the same.

Every drop of oil that gets produced every day

gets sold and consumed every day.

There is zero slack in the system

and that is why it is such a big deal

when the Iran war starts

and Iran shuts down the Strait of Hormuz.

And doing this, shutting down the Strait of Hormuz

blocks 20 million barrels of oil per day

from reaching the world.

So now we've only got 80 million barrels a day in output

to meet 100 million barrels a day in demand, right?

This equation no longer balances.

We now have a 20 million barrel a day deficit.

And this deficit means that pretty soon

20% of the oil consuming world was going to power down.

That's one in five flights,

one in five factories, power plants.

It's a global calamity.

Still the world is ready with a couple of defenses,

including this.

Oil pipelines that go around Hormuz.

- This is the East West pipeline known as Petroline.

- [Max] That big one is controlled by Saudi Arabia

and then the United Arab Emirates

controls the other main one.

- This is the Abu Dhabi crude oil pipeline.

- And these pipelines add about

seven million barrels of oil back into the system.

It's a lot.

Okay, so now just to make sure we're keeping score,

we're at a negative 13 million barrel a day deficit.

Right, we removed 20 million barrels from the system,

we add seven million back in, 13 million deficit.

It's better, but it's still really bad.

Okay, so you guys are still with me?

The other big defense that the world has

is strategic petroleum reserves,

emergency stockpiles of oil.

These tanks are all full of oil.

America and other countries

keep huge stockpiles like this for emergencies.

And they're even bigger US stocks.

I can't show you because they're kept in huge salt caves

thousands of feet underground.

Tons of countries have these reserves.

Here's Japan's, one of the world's largest.

A week into the war, 32 of these countries got together

and all opened up their reserves to the world.

This was the largest release of reserve oil in history.

Hundreds of millions of barrels from dozens of countries.

It was a huge deal,

but the war dragged on and on

and it was stretching out these releases.

So in the end, they added up to an average

two and a half million barrels per day.

So these were the world's big defenses for a mass oil shock

like what happened in the Iran War.

And together, these bring our deficit down

to 10 and a half million barrels a day.

This is still a calamity,

more than a 10th of global energy usage,

and it gets worse.

Those 32 emergency stockpiles from all over the world,

they are running out.

Here's America's reserve.

It's dropping hard and fast towards zero.

But here's Japan.

It's same thing, absolutely plunging.

So not only are these reserves

tiny relative to the hole they have to fill,

but they're only good for a few months

and then they are gone, man.

Which is exactly why everyone looked at all this and said,

"Yeah, the world is ending."

Until a few weeks in,

people started to notice something weird happening.

- Good afternoon everyone or good morning

or good evening or wherever you are.

- [Max] This is from a conference call,

a business intelligence firm called Kpler

held back in April,

walking its clients through

what was going on in the oil market.

And they focused on one thing in particular.

- What's happening with China, right?

So I just want to look at China monthly imports right now.

- [Max] China's oil imports, that's those bars in the chart,

had suddenly dropped to half.

Half.

- See, and how much longer, how long could that carry on?

- I know those guys did not seem super emotive about this,

you know, market analysts.

But trust me when I say this discovery

made people lose their minds.

And let me give you some context for why.

This shows China's oil imports since 1980,

and that rise is one of the biggest stories

in the history of oil.

This is where China surpassed the US

as the world's biggest oil importer and just kept going.

Oil has powered China's rise from the start.

Fuels their factories, latest their cities.

It's the engine of their economy.

Yes, China has been building lots of solar and wind,

but renewables like that still produce

just a fraction of the power that they get

from coal, gas, and especially oil,

which is why it seemed impossible

that right after the Iran War started,

China's imports that have been rising for decades

dropped overnight by half.

This decline here, five and a half million barrels a day

is equivalent to more than all of India's oil imports.

More than Europe's five biggest economies combined.

This was the thing that saved the world, China.

China took its imports

and magically cut it

by five and a half million barrels a day.

Which means that what started

as a 20 million barrel a day deficit from Hormuz closing

is now after all those alternate pipelines,

plus emergency stockpiles,

plus China doing whatever it's doing,

means that deficit is now down

to just five million barrels a day.

And look, that's not great.

That's still pretty serious,

but everybody shaving 5% off of their oil usage

instead of 20%

is the difference between mass blackouts

and economic collapse,

which is what we though we'd get,

and a few months of higher gas prices,

localized flight cancellations,

and some gas lines in Southeast Asia,

which is what we got instead.

So yeah, I would call that basically saving the world

really thanks to this guy.

And before we go further, I want to thank our sponsor

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So now let's get back to our story.

But China has not said a thing,

hasn't acknowledged they're doing this,

hasn't said how or why,

just stopped importing oil

by the largest amount

any country has ever stopped importing oil.

Poof!

Overnight, cold turkeyed this substance

that the entire industrialized world in China especially

have made essential to their daily functioning

for a hundred years.

And since China won't tell us how they did this,

we are just going to have to piece it together ourselves,

starting with a quiet change China made

right at the start of the war.

This article from two weeks into the war

revealed that China had ordered a total ban on fuel exports.

The context here is China has a huge refinery industry

and what it does is it turns raw crude oil

into stuff like jet fuel and gasoline.

And most of those fuels stay within China,

but because they're good at it,

they export a bunch of it to all over Asia.

Until March when China banned those refiners

from exporting a drop of fuel.

And at the time, everyone assumed

this was to preempt a potential fuel shortage within China

by building up stockpiles.

One reason I say assume is that this ban was imposed,

that's right, in secret.

That's why the story is credited

to four sources with knowledge of the matter.

That means off the record.

But that assumption about why China was doing this

was wrong.

Turns out it wasn't a stockpile jet fuel or gasoline.

It was because China was about to stop importing

half of its oil

so those refineries were about to do a lot less refining.

So rough math, I'm going to say that accounts

for cutting about half a million barrels in daily demand

out of the five and a half million that China cut overall.

Okay, next big move.

And if you care about climate change or air quality,

you're going to want to cover your ears here.

Coal.

This is from a few weeks before the war,

why China is building so many coal plants.

And it found that China commissioned

more than 50 large scale plants last year alone.

So once the war started,

China spun a bunch of those plants online

or pushed its existing plants

into overdrive or probably both.

But by April, it was burning a record amount of coal.

China also figured out a way to use coal

instead of oil to make plastics,

which usually is a petroleum product.

They also found a way to use coal to make fertilizer,

which usually also is an oil byproduct,

all of which allowed them to,

stay it with me, import less oil.

And we're not sure the exact amount,

but let's just say, and this is a guess,

another half a million barrels.

Now, by all accounts,

life remained completely normal within China,

like even more so than it did in the United States

where gas prices were crazy.

But China did find some ways

to nudge people to use less fossil fuels.

According to this Wall Street Journal story, for example,

after Chinese airlines canceled a bunch of internal flights

and air passenger traffic declined about 6%,

there was also a 5% rise in rail passenger traffic,

meaning people just took the train.

And by May, electric cars

accounted for about a quarter of all vehicles on the road,

up 33% from a year earlier.

Now, China can't make and distribute

50 million new EVs overnight,

but if you already got a large fleet

in people's hands from years of subsidies,

then when gas prices spike

because stay with me, China stopped importing oil,

people with gas cars will start carpooling

in their friend's Xiaomi SU7 EV.

They'll start taking the train

and gas consumption will go down.

The effect of this one is hard to measure,

but let's just call it another half a million barrels.

Remember, that is more than half of all the oil

that France imports.

It is a lot.

But we're still not really close

to explaining all 5.5 million

in China's disappearing demand.

And that's because we've got one big thing left.

This is China's real secret weapon

and it's something that we, the world

did not know about until now.

It's in silos just like this.

This is a chart of the world's largest oil reserves

at the start of the war before they got used up,

but there's one country missing here, China.

And the size of China's oil reserve is,

you guessed it, a state secret.

But we can get a decent idea.

These are some of China's crude oil silos

and the two main things to know about them

are that they're really, really big

and that the domes on them go up and down

based on how full they are,

all of which is fully visible from space.

There are people whose whole job is to count those silos

and how full they are

to track how much oil China has saved up.

They have more sophisticated ways

to check those numbers too,

but the silo counting works pretty well.

And those silos alone

suggest China has 1.4 billion barrels saved up.

That's more than every other country

stockpile added together.

It would be enough to fill a 12-foot tank

the size of Manhattan.

And this is just the oil we know about.

China also has oil stashed

at factories and refineries around the country,

and it's been building huge underground caverns

to store oil away where no one can count it up.

So actually, China might have way more

than even the 1.4 billion barrels that we can see,

which means China could use up,

let's say, four million barrels a day from those reserves

and it would still take more than a year to run out.

And maybe even a lot more

depending on how many of those caves it has.

Now I cannot tell you how crazy this is.

India, for example,

could live off of its stockpile for about four days.

Europe stockpile could serve it for maybe 10 or 20 days.

And the US stockpile, which took decades to build up

and is the envy of the world

would be good for 60 days,

which is why even with the US still importing

from all sorts of sources outside the Middle East,

Trump cried uncle three months to the war.

So you can understand these shock waves it sent

when it turned out China, the world's biggest oil consumer,

had saved up so much

it could cut itself off in the world like this

without breaking a sweat.

But this raises a whole other question.

How did China stow away this secret

and impossibly huge universe of oil, a Manhattan of oil?

Where did it all come from?

And there are basically two answers to this.

Incident number one is Iran,

and incident number two is Russia.

Let me explain.

- Iran and Libya sanctions bill I signed today

will help to deny those countries the money they need

to finance international terrorism.

- [Max] 1996, President Bill Clinton signs a law,

cutting off the world from buying Iranian oil.

We'll get to how in a second.

2022, Russia invades Ukraine

and the head of the European Union makes a big announcement.

- So today we will propose

to ban all Russian oil from Europe.

- [Max] Which the US and other big countries joined,

all of which did.

You know, it's easier actually if I show you on the board.

So two of the world's biggest oil producers,

Russian and Iran, were mostly cut off

from this global oil market.

All that oil sloshing around stuck with nowhere to go,

nobody to buy it.

But when you know it, bit by bit,

actually, let me show you this too on the board.

China found a way

to get all that forbidden Iranian and Russian oil.

This is a report by a think tank

called the Atlantic Council,

tracking China's secret oil trade with Iran and Russia.

And they did it by using dark fleet tankers

that operate outside of maritime laws

and obscure the operations.

They rebrand the oil as Malaysian,

funnel it through small independent refineries

called Teapots,

and then route the money via smaller

back alley financial institutions

with names like Bank of Kunlun.

But okay, if the world knows China is doing this

and all of this oil is supposedly

under global economic sanctions

that make it forbidden to buy it,

then how does China get away with it?

Well, it's by using their other secret weapon.

This, China's currency,

the renminbi, the yuan.

And the reason that this works that it's a magic hack

is because of something I didn't tell you about earlier

about this global oil market.

All of it, all of this oil

is traded in this, US dollars.

A couple of fine fellas we got up here on the board.

All of the sales, all of the purchases,

it's all in US dollars.

And the reason for this is that oil trades remember

happened between countries,

but it would be chaos

if every country paid every other country

in a different currency.

Nobody would know what the real price was.

And oil exporters would be stuck with this

grab bag of a hundred foreign currencies

that they wouldn't be able to use.

But everybody can use US dollars.

Everybody wants US dollars.

They're a safe way to save your country's oil revenues

because the dollar is stable.

Every other country accepts it in trade.

And trading all in one currency

means there's just one price,

which is what you need

for a unified global market to function.

But this gives the US a lot of power

because trading in US dollars

means those transactions have to be processed

by a US-based bank,

which means the US government can tell those banks

to block oil trades with any country it doesn't like.

People truly do not realize

how much US global power comes from these little green bags.

But this means China and Russia and Iran

were able to bypass this whole system

by using a different currency, China's currency,

to process the sales.

This makes these oil trades

basically invisible to the US financial system

and therefore, the US government,

which means the US can't block it from happening.

And if you're wondering

why more countries don't do this kind of thing,

it's because they don't have a currency

Iran or Russia or whoever would want.

The Renminbi can't do everything the dollar can do,

but it can buy stuff from China.

And China is the world's largest exporter of stuff.

So that currency is still useful enough

for Iran and Russia to go to the trouble.

Probably the only other currencies in the world

valuable enough to do this

are the Japanese Yen and the Euro.

But Japan and the European Union

are big supporters of sanctions on Iran and Russia,

so they wouldn't want to do this.

So it is really just China that can pull this off.

And being the only willing buyer of Iran and Russia's oil

means they get a big, big discount,

which is how they were able to quietly stock up

a billion plus barrels

of probably mostly Iranian and Russian oil

so they can magically stop importing enough oil

for enough time to basically save the world.

So that is how China saved you, me, the global economy,

and especially the United States and Donald Trump

from the largest oil shock in history.

But that still leaves us the question of why.

Like I'm more curious than ever.

Why?

Why would they bail us out

and why would they do it in total silence?

And to answer this,

we are going to need the other side of the board.

So we're going to use the board to go through four theories

for why China did this

that I think all have some merit and some evidence to them.

But first I want to rule out too that I think don't scan.

Number one, probably the one you've been

shouting at your screen for the last 10 minutes

because it seems so obvious,

is that China did this.

China stopped importing oil

just to protect themselves from high oil prices.

But you know what?

This one doesn't hold up.

Here's why and one number.

$74.

That is the average replacement price

on China's oil reserves that they have been burning up.

Here's the price of oil over the last six months

and here's where the price dropped below $74.

If China was just trying to protect itself

from price shocks,

this is the point that they would've started buying again.

They would've actually made a profit

by buying at this price,

but they didn't.

They just kept burning reserves,

which means they had some other motive, right?

So second wrong theory we need to rule out,

this was all a soft power play for global goodwill.

I'm sorry about the panda.

I know it's a total cliche.

When you Google image search Chinese soft power,

this is the first thing that comes up.

So I don't know, I went with it.

Anyway, it's also wrong.

The soft power theory

does not square with China's big ban

against its refineries exporting jet fuel or gasoline

because this really hurt the neighbors in Asia

who count on China for that stuff

and are the exact countries

China most wants to improve its standing with.

For another thing, remember, China did all this

and didn't talk about it.

If you save the world to make countries like you,

wouldn't you, I don't know, mention it at least once

instead of hiding it in secrecy?

So these theories, I think these are out.

So now let's look at the theories that do make sense.

Starting with the big one, Taiwan.

Here's Asia

and here's the Strait of Hormuz,

which we learned controls 20% of the world's oil flows.

And now this is the Strait of Malacca,

even narrower, even easier to close.

The ships that go through here carry 80% of all China's oil.

And in any worst scenario with Taiwan,

one of the very first things that happens

is the US uses its naval supremacy

to close Malacca like Iran closed Hormuz,

shutting off China from outside oil

and bringing China to its knees.

So yeah, pretty powerful, right?

Defeat China without ever coming

within a thousand miles of it.

And this has obsessed China's leaders for decades.

They actually have a name for it.

They call it the Malacca Dilemma,

and it applies to any worst scenario with the US,

but Taiwan is probably the likeliest.

So how can you neutralize the threat

of suddenly losing access to outside oil?

Well, one way is to build up renewable power sources

like wind and solar, which yeah,

check, China has been doing.

Another is burning more coal.

Check.

But the best way is to stockpile so much oil in advance

that you can go without imports for a year

and keep the lights on for as long as the war takes.

Under this theory, China had this whole

no oil plan ready in case of war,

but they pulled it off now both because they could

and maybe as a little demonstration to the US and Taiwan

that the Malacca problem has kind of solved

just to threaten them anymore

so don't expect them to hold them back.

Okay, ready for theory number two?

Leverage with Donald Trump.

Trump and Xi actually just had

a big one-on-one summit in May.

And you know, watching this,

it's not hard to imagine Xi telling him,

"Hey Donald, I'm single-handedly

saving your economy right now by absorbing the oil shock

so it doesn't hit the United States.

So you want me to keep this up,

you better make it worth my while."

Because he knows if there's one thing Trump has shown

he's sensitive to,

it's the price of oil.

Now, nobody can prove this happened.

Yeah, a few weeks beforehand, the US did withdraw

a bunch of missile defense

and other weapons from China's periphery,

which China liked to use in the Middle East,

but that might be a coincidence.

I would consider this the softest theory.

Still, as long as the war goes on,

Xi Jinping really could nuke the US economy anytime he wants

by resuming Chinese oil imports

and exhausting global supplies.

Did he remind Trump of that fact when they met?

You know, we don't know.

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Now, let's get back to it.

Okay, theory number three,

and I'm pretty partial to this one.

Protecting China's export-based economy.

China's economy, like we said,

centers on manufacturing and exporting

basically everything in the world.

Here's every country China exports to

scaled by overall value.

Now let's cross out all the countries

whose economy would implode in a sustained oil shock.

This one, this one,

probably these guys,

definitely the Europeans.

Yep, here.

Okay, well, China just lost half of its export market

and a bunch of its economy with it.

Or that's what would've happened

if China hadn't propped everyone up for three months

by absorbing the oil shock.

Now I can't prove that's why they did it,

but I do think it would make a lot of sense.

Okay, theory number four.

They did this to prove to the world

that China now controls the global price of oil.

I had to print this out of my home printer

because the photo printer stopped working.

That's why the Chinese flag is purple.

I don't know, my apologies to China.

Credit for this theory goes to a Bloomberg columnist

named Javier Blas, who argued this was China unveiling

its powerful new oil price weapon.

He compares it to the 1973 oil shock

when Arab oil states like Saudi Arabia and some others

shut off oil to the US,

a power that got termed the Arab oil weapon

and made those states global player ever since.

And he argues that,

yeah, on some level, this was probably about

Taiwan and Malacca.

But if China proved that it can flip

5% of the world's oil demand on and off like a switch,

that gives them Saudi Arabia level influence

over the world's most valuable resource,

which gives them a lot of leverage

over any country that buys a lot of oil

or that sells a lot of oil,

which is pretty much all of them.

I think there's probably

some truth to all four of these series, right?

I don't think they're mutually exclusive.

Now, we don't know enough.

We can't peer inside Xi Jinping's head

and know like which one is the truest,

but I think if you look at these four together,

you have a pretty good understanding

of why China did this.

Okay, so the question now

is what does all this add up to?

What does it change about our world?

And we the world learned a few new things here.

One, China has neutralized the so-called Malacca Dilemma

that would've allowed the US Navy

to shut down their economy.

And that makes war with the US more bearable for China

and an invasion of Taiwan, therefore more likely.

And two, China now has

a lot of control over global oil prices,

although I don't think we yet know

how they would use that power

except how they did here to blunt a global oil shock.

But you know, the Iran war is still a little low boil,

which means as long as Hormuz is at threat of closing

or partially closed,

Xi Jinping has a lot of leverage over the United States.

He has that button on his desk that says nuke US economy.

And along those lines,

the US, China's big rival,

it came out of this war weakened on the world stage

in a lot of different ways

that we talked about in the last video.

Russia meanwhile is still admired in Ukraine.

That means that among the major world powers,

China is looking pretty good right now,

which is part of why there is a growing consensus

that the war's real winner was China.

China won, they're the winner.

China's the big winner here.

China wins.

This is a little too clever, I think.

Iran won the Iran War,

but China did win something very, very big.

And it's easy to explain if I put it on the board for you.

So forever and ever,

these have been the three world powers of oil

for like the last century.

The US, Saudi Arabia, Russia.

They are the three biggest producers in the world by far.

The US guarantees free flow of oil in the world's oceans

and controls the US dollar.

Saudi Arabia is the de facto leader of OPEC,

the Alliance of Oil Producing States.

And Russia, in addition to being a world power

and a huge exporter,

controls land-based oil flows

across a bunch of Europe and Asia.

But this era might be over or at least starting to end.

The US proved in the Iran war

that it cannot guarantee

the global free flow of oil anymore.

And Russia is under global sanction

and can barely sell its own oil.

So these two powers might be out.

And who displaced them?

Well, arguably one of them is Iran,

which is not the world's biggest producer,

they're ranked seventh,

but they prove that they can unilaterally turn

on or off 20% of the world's oil supply

and nobody can stop them.

And the other new global oil power,

I think you know where this is going.

I think you can make an argument for China.

You know, they kind of control the price of oil now

or at least have huge influence over it

because they can switch 5% of global demand on and off.

And because they were able to do

what the United United States wasn't in this war

and secure sufficient flows

of the world's most important resource,

single-handedly saving the oil burning world from disaster.

That sounds like the behavior of a global oil power to me.

Now, I don't know what China wants to do with that power.

I mean, we have some educated guesses obviously,

but they're not telling us.

They might not even know.

They might have themselves

just discovered how powerful they are here

right along with the rest of us.

But one thing is for sure,

now that they have this power,

they've demonstrated it,

they've proven to the world that they have it,

I am certain this will not be the last time

that we see it deployed.

(gentle music)

(gentle music continues)