China Plans to Reduce Oil Refining Capacity Amid Overcapacity Crisis

The Chinese government is set to reduce its oil refining and petrochemical production capacity as part of an initiative to address significant overcapacity in the industry. According to a report from Bloomberg, authorities plan to close smaller refineries and upgrade facilities that are considered outdated. These outdated refineries account for approximately 40% of China’s total refining capacity.

Upgrades will focus on retrofitting existing facilities to enhance their production capabilities. The government is encouraging refiners to transition toward producing more specialty chemicals rather than bulk refined products, where supply currently outstrips demand. This shift aims to cater to healthier markets involving applications in artificial intelligence, biomedical devices, robotics, semiconductors, and alternative energy sources, as noted by Bloomberg.

China holds the distinction of having the highest oil refining capacity in the world, with projections indicating an increase to over 21 million barrels per day by 2025. Despite this substantial capacity, a report from Wood Mackenzie earlier this year suggested that without significant adjustments, nearly 10% of China’s refineries may close before the end of 2034.

The refining and petrochemicals sector in China has faced rising losses, increasing by 8.3% in the first half of 2025 compared to the previous year. This downturn has been attributed to overcapacity and ongoing price wars affecting various industries across China. Specifically, losses in the refining sector alone surged by over $1.25 billion (approximately 9 billion Chinese yuan) during the same period.

Interestingly, the solar power industry in China is also grappling with similar overcapacity issues. This situation is somewhat paradoxical given that solar and wind energy were expected to replace oil and gas, potentially undermining the refining industry. The aggressive push to expand refining capabilities also led to a significant buildout in solar energy, resulting in increased price competition, company failures, and approximately 87,000 layoffs in the sector last year.

As China navigates these challenging dynamics, the government’s forthcoming measures to trim the oil refining sector represent a strategic move aimed at stabilizing an industry facing both internal and external pressures. The outcome of these adjustments will likely shape the future landscape of China’s energy and chemical production sectors.