Syllabus: Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests
Global Oil Market Dynamics
- Market Scale: Crude is world’s most valued commodity with over 100 million barrels daily (mbpd) production.
- Trade Volume: Nearly half traded internationally worth over $3 billion daily; vital for transport and petrochemicals.
- India’s Position: World’s third-largest oil importer significantly impacted by global price fluctuations.
Supply and Demand Trends
- Production Surge: Global output increased 5.6 mbpd last month; 3.1 mbpd from OPEC+ unwinding COVID cuts.
- Technology Impact: Shale extraction, horizontal drilling enhanced production; remaining growth from U.S., Canada, Brazil, Argentina.
- Demand Slowdown: 2025 demand growth projected at merely 1.3 mbpd or 1.2% annually.
- China Factor: World’s largest importer facing consumption curb from economic slowdown and electric vehicles adoption.
- OECD Stagnation: Fossil fuel consumption stagnant in industrialized countries due to weak recovery and climate concerns.
Price Movements and Projections
- Current Prices: Brent crude at $61 per barrel, declining 16% since year beginning.
- Conflicting Forecasts: OPEC predicts 50,000 bpd supply shortage in 2026; IEA projects 4 mbpd overhang.
- Expert Consensus: Most think-tanks predict oversupplied market with Brent falling to low fifties per barrel.
OPEC+ Dynamics and Wildcards
- Internal Conflict: Saudi Arabia wants quick production increase; Russia favors gradual approach under sanctions.
- Geopolitical Factors: Potential sanction removals on Russia, Iran, Venezuela; West Asian tensions; U.S.-China tariff wars.
- IMF Outlook: Global growth slowing to 3.2% (2025) and 3.1% (2026); trade growth declining to 2.9%.
Implications for India
- Financial Impact: Oil imports worth $137 billion; each dollar price decline improves current account deficit by $1.6 billion.
- Economic Benefits: Reduces subsidy burden, inflation; improves fiscal balance boosting capital expenditure and growth.
- Strategic Shift: Oil glut may reduce discounted Russian crude dependence, easing U.S. tariff frictions.
- Downside: West Asian remittances, exports and investments may stagnate as regional economies weaken.
- Policy Caution: Given cyclical oil market nature, India must maintain consumption mitigation strategies continuously.
Q- Falling global oil prices present both opportunities and challenges for India. Discuss the economic implications of declining crude prices on India’s fiscal position, inflation, and external sector. (10 Marks)