Declining Oil Prices: Causes, Global Impact, and Opportunities for India

Context:

Recently, the global crude oil market has been experiencing a decline in both demand and prices.
This trend has significant implications for the global economy and India, a major oil-importing nation.
Understanding crude oil, its consumption trends, global disruptions, and impact on India is crucial to assess the situation.

Definition: Crude oil is a naturally occurring fossil fuel, composed of hydrocarbons, extracted from underground reservoirs and refined into usable products like gasoline, diesel, and jet fuel.
Formation: Derived from ancient marine organisms, transformed over millions of years under heat and pressure.
Composition: A complex mix of hydrocarbons with impurities such as sulfur and sometimes metals.
Appearance: Black, brown, or amber liquid; sometimes thick, tar-like substance.
Physical Properties: Classified by density (light, medium, heavy) and sulfur content (sweet or sour).
Usage & Importance:
- Crude oil has limited direct use; requires refining.
- Refined products include fuels, plastics, lubricants, cosmetics, and asphalt.
Economic Importance:
- 100 million barrels/day (mbpd) produced globally, with nearly 50% traded internationally.
- Daily global crude trade exceeds $3 billion, making it a vital energy source and financial commodity.

Technological Impacts on Supply:
- Innovations like shale extraction, horizontal drilling, ultra-deepwater drilling have boosted supply.
- Over the past two decades, technology and economics have exerted a bearish influence on oil prices.
Global Demand Dynamics:
- Growth continues in the Global South, albeit from a low base.
- In industrialized countries, demand is stagnant due to:
  - Slow post-COVID recovery
  - Climate concerns
  - Rise of electric vehicles (EVs)
Key Data:
- Global crude demand in 2025 is projected to grow by 1.3 mbpd (1.2%).
- Only 10% of this growth comes from 38 OECD countries, which account for 46% of global GDP.
Impact of EVs:
- China, the largest crude importer, sees demand curbed by economic slowdown and EV adoption, now representing 50% of vehicles sold.
Production Surge:
- Global production rose by 5.6 mbpd over last year:
  - 3.1 mbpd from OPEC+ (unwinding COVID-era cuts)
  - Remaining growth from U.S., Canada, Brazil, Guyana, and Argentina
Price Trends:
- Brent crude is at $61/barrel, down 16% year-to-date, with nearly half of the decline in the last month.
- Price drop mitigated by strategic reserves replenishment and 100+ million barrels stored at sea.

Geopolitical Tensions:
- Decline in prices persists despite China-U.S. tariff wars and Ukrainian attacks on Russian energy infrastructure.
OPEC+ Dynamics:
- Supply surplus has created internal disagreement:
  - Saudi Arabia: wants to unwind cuts quickly to regain market share
  - Russia: favors gradual approach due to sanctions
Contrasting Forecasts:
- OPEC: 2026 supply shortfall of 50,000 bpd
- IEA: 2026 supply surplus of 4 mbpd
- Majority of think-tanks agree with IEA, predicting Brent prices may fall further to the low $50s, a 10–20% decline
Other Influences:
- Sanctions on Russia, Iran, Venezuela, West Asian tensions, and trade policy shifts remain key uncertainties.
- IMF WEO (Oct 2025) forecasts:
  - Global growth slowing to 3.2% in 2025, 3.1% in 2026
  - World trade growth slowing to 2.9%, down from 3.5% in 2024

Positive Impacts:
- Lower oil prices and weaker USD benefit India’s current account deficit.
- India’s oil imports in 2024-25: $137 billion; $1 decline in oil prices improves deficit by $1.6 billion.
Reduced Subsidy Burden:
- Retaining most gains reduces subsidy pressures, improves fiscal balance, and boosts capital expenditure.
Strategic Advantage:
- Reduced reliance on discounted Russian crude eases tariff tensions with the U.S.

Caveats:
- Remittances, exports, and investments may stagnate due to slower West Asian growth.
- The oil market is highly cyclical, so current benefits may be short-lived.
Advice for India:
- Continue energy consumption mitigation strategies.
- Strengthen energy security to navigate future market volatility.