US Sanctions on China's "Teapot" Refiners Could Backfire

Going by proxy after Iran oil production

By: Tim Daiss

Shandong teapot refiner. Photo from OilPrice News

Donald Trump is applying fresh pressure against Iran’s oil production, this time with a twin goal – to not only help dry up funding for the Islamic Republic’s proxy wars in the Middle East to force it to the negotiating table over its nuclear development, but also to bring China to task.

On March 20, for the first time, Washington’s sanctions included so-called Chinese “teapot” refineries with connections to Iran. These facilities, primarily located in Shandong province, are small, independently owned non-state run refiners that process fuel oil and bitumen into transportation fuels or asphalt, often operating on very thin margins. Teapots usually misrepresent the origin of their oil products to conceal that they are from sanctioned countries, usually bought at heavily discounted prices.

It is Washington’s fourth round of sanctions against Iranian oil sales since Trump said in February that he was re-imposing a “maximum pressure” campaign, including efforts to drive down Iran’s oil exports to zero. Not surprisingly, Beijing doesn’t recognize US sanctions and remains the largest importer of Iranian crude. China and Iran have built a trading system that uses Chinese yuan and a complex network of brokers and middlemen to avoid trading in dollars, thus skirting exposure to US regulators.

On a post on X, US Treasury Secretary Scott Bessent said that “teapot refinery purchases of Iranian oil provide the primary economic lifeline for the Iranian regime, the world’s leading sponsor of terror and the primary backer of the murderous Houthis in Yemen.” The US State Department confirmed in a press release that it was the “United States’ first designation of a teapot refinery.” The US also imposed sanctions on at least 12 entities, and identified eight vessels as blocked property it claimed were responsible for shipping millions of barrels of Iranian oil to China. These vessels are part of Iran’s shadow fleet of tankers that supply these murky private refineries.

Though China’s oil imports declined last year by 2 percent year-on-year to 11.1 million barrels per day (bpd), according to the US Energy Information Administration (EIA), it remains the world’s top oil importer. As such, it carries considerable clout and buying power in global oil markets. Part of Beijing’s overall geopolitical strategy includes removing the decades-long practice of pricing oil in US dollars, thereby removing Washington’s ability to sanction both oil importers and exporters.

Sending shockwaves

The US is going to likely target even more Chinese teapot refineries and Iranian oil exports which could reverberate through global energy markets by putting upward pressure on global oil prices – the very problem that Trump promised to remedy during the election last year. This, in turn, could also complicate the administration’s goal of bringing inflation down. If inflation persists along with higher energy prices, it could also negatively impact the Republicans’ ability to hold the House during mid-term elections in 2026. If Republicans lose the House during midterms, all bets on Trump pushing through with his agenda during the last two years of his presidency are off.

The swing factor that could keep oil prices lower will be whether OPEC is willing to ramp up production. If so, the US would likely slap more sanctions on Chinese teapots. If not, the situation ahead is unclear. But OPEC remains an unreliable and even fickle partner. In the past, the cartel has both placated the wishes of a multitude of US presidents as well as ignored their requests – sometimes to the cartel’s own peril, sometimes not, but always with an aim to maintain a semblance of control over global oil markets.

A recent Rystad Energy report upped the ante even more, claiming that the latest round of US sanctions on Iran, which now targets the Chinese refiners, has potential consequences reaching far beyond Iran itself, even reshaping geopolitics, disrupting the global economy, and slamming energy markets. It added that while there is not yet a “maximum pressure situation – where Iranian oil exports could drop from 1.5 million bpd to near zero – Washington is stepping up efforts to push Tehran back to the negotiating table for a nuclear deal. However, there’s a caveat in all of this, Rystad says. To achieve maximum effectiveness the US would need Chinese co-operation.

Delicate balancing act

Given Trump’s recent tariff hikes on all Chinese goods entering the US and the continued disintegration of Sino-US relations on all levels, the possibility of receiving help from Beijing looks slim. Washington will likely have to try to persuade its own oil producers to open up their production spigots even more, a delicate act given that, by law, the government has no regulatory authority to intervene in US oil production. In fact, it is supposed to avoid it. The US is already by far the top global crude oil producing country, averaging some 13.1 million bpd, ahead of Saudi Arabia at the second slot (10 million bpd), and Russia at the third (9.5 million bpd ).

The Trump administration would also have to mount an impressive campaign to persuade de facto OPEC leader Saudi Arabia to increase oil production and hold down prices, while negating the obvious that it would be more in Riyadh’s self-interest to hold steady or even trim production in order to help drive up prices and profits. Notably, Saudi Arabia can sometimes be persuaded to increase production while its OPEC brethren remain on the fence. How this plays out, however, remains to be seen. But it could either help Trump push his unorthodox agenda forward or propel him into becoming a lame duck president in his last two years in office, with likely fresh calls for impeachment from incensed House Democrats.

Tim Daiss is an energy markets journalist and analyst in the Asia-Pacific region. He is a partner at APAC Energy Consultancy.