The Peak Oil Demand Theory in China and the Shift in Energy Security Calculations: Implications for South Korea's Supply Chain Response

Executive Summary

Assessments that China's crude oil demand has reached a structural peak as a cumulative result of electric vehicle (EV) adoption, alternative fuel policies, and public transportation investments are being formalized even within state-owned energy enterprises such as Sinopec and CNPC. The depletion of strategic petroleum reserves and adjustments in refinery operating rates during the Iran-Israel conflict served as a catalyst that visualized the already ongoing trend of slowing demand. More fundamentally, the shift in Beijing's energy security concept from controlling resources like crude oil to controlling processing technologies for batteries, semiconductors, and critical minerals is directly linked to the restructuring of supply chains in the trade and economic security domains. However, since a structural dependence on Iranian crude oil remains, a dual-track path combining resource and technology strategies is the most likely scenario, which has implications for both South Korea's supply chain strategy toward China and its management of Middle Eastern crude oil supply and demand. The Ministry of Trade, Industry and Energy (MOTIE) and the Ministry of Foreign Affairs (MOFA) need to establish an early response system by using the policy signals of these state-owned enterprises as leading indicators of Chinese domestic politics.

I. Analysis of the Issue

The Rise of the Peak Oil Demand Theory in China and the Shift in Energy Security Calculations

1. Background and Progress

China's crude oil import structure passed a clear inflection point in 2026. During the military conflict between Iran and Israel, China's seaborne crude oil imports fell from around 11 million barrels per day (bpd) to the low 8 million bpd range in June [10]. In the process, Beijing depleted 140 million barrels of its strategic petroleum reserves (SPR). Refiners lowered their crude throughput. The government restricted exports of gasoline and diesel to protect domestic inventories [10]. Some assess that this adjustment was less of a crisis response and more of a manifestation of the already ongoing trend of slowing demand. Michal Meidan, a research scholar at Columbia University's Center on Global Energy Policy (CGEP), points out that both Sinopec and CNPC assess that their country's overall oil demand has peaked [2]. She notes that a perception is spreading within China that 'oil is yesterday's story' [2].

This assessment did not emerge overnight. An analysis by the Council on Foreign Relations (CFR) suggests that it is the cumulative result of policies Beijing has implemented to suppress fossil fuel demand, such as expanding EV adoption, alternative fuel policies, and public transportation investments [6]. Some observers also note that as demand for road transport fuel weakens, China has entered a phase of depleting its inventories [9]. This aligns with the assessment that the sharp drop in China's crude oil imports was one of the key factors contributing to the stabilization of international oil prices [9][10].

2. Current Situation

From a market perspective, the shift in China's attitude is read not merely as a contraction in demand, but as a redefinition of the very concept of energy security. Erica Downs, a research scholar at Columbia University's CGEP, reports that a perception is spreading among Chinese analysts that the source of energy security is shifting from the control of resources like crude oil to the control of technology [2]. This suggests that the Chinese government is shifting its focus from competing to secure crude oil to acquiring upstream supply chain technology assets, such as battery, semiconductor, and critical mineral processing technologies.

At the same time, China is offsetting the reduction in its external dependence on crude oil by expanding domestic fossil fuel production. State media reported that more than 100 billion cubic meters of deep coalbed methane, located at depths of over 1,500 meters, have been confirmed in Shanxi Province. This was presented as an achievement in strengthening national energy security [11]. This case demonstrates that even as the peak oil demand theory is being formalized, Beijing is pursuing a dual strategy that runs parallel with the development of unconventional gas resources.

However, China's dependence on Iranian crude oil remains a structural constraint. Al-Monitor analyzes that although Beijing holds significant leverage over Tehran, it has no incentive to exercise it on behalf of Washington. This is because China's dependence on Iranian crude oil persists [8]. A U.S. energy advisor pressured Gulf oil producers to build new crude transport routes bypassing the Strait of Hormuz, while noting that China still has room to further expand its refining and export capacity [14]. This points to a permanent reshaping of the Middle East energy map [14].

3. Key Actors and Positions

Sinopec and CNPC: The two state-owned oil enterprises have officially assessed that domestic oil demand has already peaked [2]. Rather than a mere market forecast, this is a corporate-level strategic declaration that directly affects future investment allocation, refining capacity adjustments, and overseas crude oil procurement strategies. Corporate interests in managing refining margins and facility utilization rates underpin this assessment.

Chinese Central Government: As demonstrated by the release of strategic petroleum reserves and fuel export restrictions, Beijing prioritizes domestic supply stability in the face of external shocks [10]. At the same time, a policy stance is detected that seeks to shift the focus of energy security from securing resources to controlling technology and supply chains [2]. This aligns with the strategy of using the leverage China has already secured in rare earths and critical minerals as a bargaining chip in U.S.-China negotiations [5].

United States: While the Trump administration seeks to tighten control over China's access to energy, UAE media outlets assess that China maintains strong leverage in rare earths and critical minerals [5]. U.S. energy advisors are pressuring Gulf oil producers to build infrastructure that reduces their dependence on the Strait of Hormuz [14].

Southeast Asian Nations: Reports by the Nihon Keizai Shimbun (Nikkei Asia) indicate that the energy shock triggered by the war in Iran has reinforced a trend of prioritizing renewable energy and electrification policies over fossil fuel expansion plans. However, practical challenges such as power grids and financing remain unresolved [12].

4. Key Issues

The first issue is whether China's assessment of peak demand is a temporary economic adjustment or a structural transition. Market interpretations diverge as short-term factors, such as the sharp drop in imports and inventory depletion caused by the war in Iran, are intermingled with long-term factors like the expansion of EVs and public transportation [6][9][10].

The second issue is the shift in the concept of energy security. If the center of gravity moves from competition over securing resources to competition over controlling technology, this fundamentally alters the nature of supply chain restructuring pressures that South Korea's MOTIE and MOFA must monitor. The possibility is raised that competition over batteries, refining technologies, and critical mineral processing technologies will replace the competition to secure crude oil [2][5].

The third issue is China's dual-track strategy. The move to expand the development of domestic fossil fuel resources, such as coalbed methane, while formalizing the peak oil demand theory [11] demonstrates Beijing's pragmatic approach to maximizing energy self-sufficiency while advocating for a decarbonization transition. This is a characteristic of the Chinese-style transition model, where the pretext of addressing climate change coexists with the practical benefits of energy security.

The fourth issue is the response of Middle Eastern oil producers. As China's demand slows and U.S. supply chain pressure intensifies simultaneously, Gulf nations face pressure to establish alternative transport routes that reduce their dependence on the Strait of Hormuz [14]. Coupled with the potential expansion of China's refining and export capacity, this could lead to a realignment of Middle East-China energy relations.

The implication for South Korea is that this landscape shift is more likely to occur in upstream supply chain technology assets rather than crude oil procurement routes. There is a need for MOTIE and MOFA to preemptively track China's policy changes in battery materials, refining technologies, and critical mineral processing capabilities.

II. In-Depth Analysis of the Issue

The Peak Oil Demand Theory in China and the Shift in Energy Security Calculations: An In-Depth Analysis

1. Analysis of Root Causes

The peak oil demand theory in China is not a single event, but the cumulative result of a three-pronged policy approach. An analysis by the CFR suggests that expanding EV adoption, alternative fuel policies, and public transportation investments have structurally suppressed fossil fuel demand [6]. These policies have been implemented since the early 2020s, and the current peak theory is closer to a manifestation of these accumulated results.

The military conflict between Iran and Israel served as a trigger. China's seaborne crude oil imports plummeted from 11 million bpd before the conflict to the low 8 million bpd range in June [10]. Beijing depleted 140 million barrels of its strategic petroleum reserves, lowered refinery operating rates, and restricted gasoline and diesel exports [10]. While this adjustment has the character of a crisis response, some analyses suggest it is also the result of entering an inventory depletion phase at a time when road transport fuel demand had already weakened [9]. In other words, a supply shock accelerated the pre-existing trend of slowing demand.

The more fundamental cause lies in the fact that the Chinese leadership is changing the very definition of energy security. Erica Downs, a research scholar at Columbia University's CGEP, reports that a perception is spreading among Chinese analysts that the source of energy security is shifting from the control of resources like crude oil to the control of technology [2]. The background of Sinopec and CNPC simultaneously delivering the assessment that 'oil is yesterday's story' [2] signals that even state-owned energy enterprises judge that the strategic value of competing to secure crude oil has declined.

2. Structural Context

Economic and Trade Structure

This shift aligns precisely with supply chain restructuring, a key monitoring point in the trade and economic security domains. China is shifting the center of gravity of its security strategy from vulnerable assets like crude oil to upstream supply chain technology assets where it holds an advantage, such as batteries, semiconductors, and rare earth processing. An asymmetric structure—where Washington seeks to expand its leverage over Beijing's energy access while China maintains strong bargaining power in rare earths and critical minerals—forms the axis of U.S.-China trade relations [5]. The reduction of crude oil dependence is interpreted as an attempt by China to mitigate its relative vulnerability within this asymmetric structure.

At the same time, China is offsetting its external dependence on crude oil by developing domestic unconventional resources. State media reports that more than 100 billion cubic meters of deep coalbed methane, located at depths of over 1,500 meters, have been confirmed in Shanxi Province [11] illustrate this complementary strategy. Even as the peak oil demand theory is formalized, Beijing is pursuing a dual strategy of expanding its domestic fossil fuel production base. This approach manages energy security through two pillars simultaneously: 'demand suppression' and 'supply diversification.'

Chinese Domestic Political Structure

Although Sinopec and CNPC are state-owned enterprises, they are not independent business decision-making bodies. Their assessment of peak demand should be viewed as a signal coordinated with the energy policy direction of the Chinese Communist Party (CCP) and the National Development and Reform Commission (NDRC). A state-owned energy enterprise formalizing its country's peak demand carries significant political weight. This can be interpreted as a signal foreshadowing a realignment of mid-to-long-term national energy plans, including future investments in refining facilities, strategies for acquiring stakes in overseas oil fields, and guidelines for operating strategic petroleum reserves. The Chinese government's continuous injection of policy resources into the EV and battery industries can also be understood in this context. However, when automakers diversified their supply lines away from the CATL battery supply chain, a media outlet under the Ministry of Industry and Information Technology (MIIT) published a commentary warning against market overreaction [13], suggesting that tensions regarding the pace of transition exist even within domestic industrial policy.

Security Structure: Constraints of Relations with Iran

Despite the shift in energy security calculations, China's dependence on Iranian crude oil remains a structural constraint. Al-Monitor assesses that Beijing holds significant leverage over Tehran [8]. Nevertheless, it points out that China has no incentive to exercise this leverage on behalf of Washington [8], because its dependence on Iranian crude oil persists [8]. This means that even as the peak demand theory spreads, China's practical reliance on discounted Iranian crude oil will not be resolved immediately. This point illustrates the duality of China's energy policy, where the long-term trend of climate change and decarbonization transition coexists with the short-term benefit of securing geopolitically discounted crude oil.

3. Comparison with Historical Precedents and Similar Cases

Developed Countries' Experience with Peak Oil Demand

The phenomenon of peak oil demand itself is not new. Advanced economies, including the United States, Europe, and Japan, have already experienced stagnant or declining oil demand since the mid-to-late 2000s through vehicle fuel efficiency regulations, industrial restructuring, and population stagnation. What is different about China is that it is traversing this trajectory in a highly compressed timeframe. Previous EAI research pointed out that China had been projected to see the largest increase in energy demand over the next 20 years [7]. The current peak theory is read as a signal that these long-term projections themselves may need to be revised.

Changing Nature of U.S.-China Energy Relations

Previous EAI analysis diagnosed that U.S.-China energy relations, originally complementary, degenerated into a zero-sum game through the trade war. Professor Lee Wang-hwi projected that 'even if the trade war is ended through negotiations, China will seek to reduce its dependence on U.S. energy' [7]. The current peak oil demand theory is an extension of this projection. As China moves to reduce the strategic importance of crude oil itself, the space for U.S.-China cooperation mediated by energy is shrinking further.

Differences Between the 2026 Iran Crisis and Past Oil Shocks

In past oil shocks (1973 and 1979), supply shocks immediately led to price surges and real economic damage. However, during the 2026 Iran-Israel conflict, international oil prices did not soar to the $150 per barrel level [1]. Observers note that a surge in the passage of covert tankers ('dark tankers') bypassing the Strait of Hormuz helped restore crude oil supply to 60% of pre-conflict levels, contributing to price stability [1]. In addition, the CFR assesses that China's demand-side adjustments—managing demand for what is termed the 'forgotten fuel'—contributed to price stability just as much as supply-side responses [6]. This represents a fundamental difference from past oil shocks, as importing countries now possess far greater policy capacity for response.

Comparison with Southeast Asian Responses

The acceleration of the energy transition triggered by the Iran crisis is not a phenomenon unique to China. Research shows that Southeast Asian nations are adjusting their policies to prioritize renewable energy and electrification over fossil fuel expansion plans in the wake of the energy shock from the war in Iran [12]. However, power grids and financing remain key challenges [12]. While China's peak demand theory and Southeast Asia's renewable energy acceleration follow distinct trajectories, they share a common pattern where supply shocks act as a catalyst to accelerate the decarbonization transition.

4. Key Variables

The first variable is China's domestic investment decisions regarding refining and petrochemical facilities. Since state-owned enterprises have officially acknowledged peak demand, investments in new refining facilities are highly likely to contract. However, as some point out that there is still room to expand refining and export capacity [14], the actual pace of investment reduction remains to be seen.

The second variable is the direction of trade, technology, and critical mineral negotiations between the U.S. and Chinese leaders. The fact that trade, technology, and critical minerals were addressed as key agenda items during the Xi-Trump meeting in Washington [15] aligns with the shift in the center of gravity of energy security from crude oil to technology and minerals. The outcome of these negotiations could dictate the pace of China's supply chain restructuring.

The third variable is the continuity of relations with Iran. As long as China maintains its practical reliance on Iranian crude oil, its exposure to geopolitical risks will persist regardless of the peak demand theory [8]. The intensity of U.S. sanctions on Iran and the stability of the Strait of Hormuz directly affect this variable.

The fourth variable is the performance of domestic unconventional resource development. If domestic production expands faster than expected, as in the case of Shanxi Province's coalbed methane [11], China's narrative of energy self-sufficiency could be further reinforced. This represents another pillar determining the pace of reducing external crude oil dependence.

From South Korea's perspective, it is necessary to keep in mind that this transition in China could have direct repercussions on the export volumes of the domestic refining and petrochemical industries to China, the competitive dynamics in battery and critical mineral supply chains, and the competition over decarbonization technology standards.