US-Iran war leaves Iran devastated, squeezes China’s cheap oil lifeline

ERBIL, Kurdistan Region - The war between the United States and Iran has left Tehran facing severe economic destruction while simultaneously dealing a costly blow to China, which had become the biggest beneficiary of discounted Iranian oil under years of sanctions.

More than 50 days of conflict, strikes on energy infrastructure, and a subsequent US naval blockade in the Strait of Hormuz have shaken two economies in very different ways: Iran is battling losses estimated in the hundreds of billions of dollars, while China is scrambling to protect supplies that fueled its private refineries and helped contain energy costs. 

Before the war erupted on February 28, Iran’s economy was already suffering from high inflation, weak growth, sanctions pressure, and a rapidly depreciating currency. International institutions had described the country as stuck in a cycle of low growth and chronic instability.

The conflict deepened those problems dramatically. Iranian officials are now said to estimate total damage at around $270 billion, with petrochemicals, steel production, transport networks, and digital infrastructure among the hardest-hit sectors.

Iran’s energy sector suffered some of the heaviest blows. Kharg Island, through which most Iranian crude exports traditionally pass, came under major US attacks earlier in the war. Though terminals were reportedly spared direct destruction, shipping activity collapsed as insurers, tanker operators, and buyers withdrew amid military risk. 

Meanwhile, Israeli strikes reportedly hit parts of the South Pars Gas Field and associated petrochemical facilities, disrupting domestic gas production and export capacity. South Pars is one of the world’s largest gas reserves and central to Iran’s power generation and industrial system.

The consequences were felt beyond Iran’s borders. Reduced Iranian gas flows to Iraq added pressure to Iraq’s already strained electricity network, where Iranian imports have long played an important role.

Inside Iran, inflation has accelerated further. Food prices have surged, wages have lost value against the dollar, and purchasing power has eroded sharply. Economists warn that even if fighting ends soon, reconstruction could take years, particularly if sanctions remain in place.

Yet while Iran absorbed the direct destruction, China has emerged as one of the main external losers from the blockade phase of the war.

For years, Beijing quietly benefited from cheap Iranian crude sold below market rates. Much of that oil was believed to flow through opaque shipping networks and be processed by independent “teapot” refineries concentrated in Shandong province. Those discounted barrels gave Chinese refiners a competitive edge and helped cushion the world’s second-largest economy from global price swings.

By early 2026, analysts estimated China had also accumulated strategic reserves amounting to roughly 1.2 billion barrels, giving Beijing an important emergency buffer.

But the US decision to impose a naval blockade targeting Iranian-linked shipping changed the equation. President Donald Trump announced measures aimed at vessels entering or leaving Iranian ports and at ships accused of paying transit fees to Tehran. 

Shipping through Hormuz has since been heavily disrupted. Traffic data cited by media outlets showed volumes falling sharply from normal levels, while some vessels turned back rather than risk interception.

That disruption matters enormously for China. Roughly 40 to 50 percent of Chinese crude imports normally transit the Strait of Hormuz, according to market estimates. While Beijing can draw from reserves and diversify purchases from suppliers such as Russia, replacing cheap Iranian crude comes at a price.

Russian and alternative Middle Eastern grades are generally more expensive than sanctioned Iranian barrels, squeezing already thin refining margins. Smaller Chinese refineries that relied heavily on Iranian cargoes now face the prospect of reduced profits or temporary shutdowns if the disruption persists.

China has publicly called for safe navigation and restoration of normal traffic through Hormuz. Chinese Foreign Minister Wang Yi said freedom and security of navigation should be ensured while respecting regional sovereignty.

Oil markets worldwide are also watching closely. Citigroup analysts warned global oil inventories could fall by as much as 900 million barrels even if the ceasefire holds and flows gradually normalize. 

For now, Tehran and Beijing share a common problem created by the same war, though at very different scales. Iran faces devastated infrastructure, weakened exports, and a deepening cost-of-living crisis. China faces higher import costs, supply uncertainty, and growing exposure to geopolitical chokepoints.

If the truce collapses or the blockade continues, both countries could face even steeper economic pain in the months ahead.

Omar Ahmed is editor-in-chief of Rudaw’s Economy Desk.

The views expressed in this article are those of the author and do not necessarily reflect the position of Rudaw.