Global crude oil prices have been falling, reaching around $61 per barrel, the lowest in recent months. The decline comes amid a global supply surplus and slowing demand, offering potential economic relief for India — the world’s third-largest oil importer.
Background
- Crude oil remains the most traded commodity globally, with over 100 million barrels produced daily, nearly half of which is traded across countries.
- Despite geopolitical tensions like the Ukraine war and the U.S.-China trade conflict, the oil market is witnessing a sharp drop in prices due to changing demand and supply patterns.
- The current situation represents an ongoing contest between OPEC+ producers and non-OPEC exporters, with consumers benefiting from the price dip.
Supply Dynamics
- New extraction technologies such as shale oil, horizontal drilling, and deep-sea exploration have significantly expanded production capacity.
- In the past year alone, global oil production increased by 5.6 million barrels per day (mbpd).
- Of this, 3.1 mbpd came from OPEC+ countries, which lifted COVID-era production curbs.
- The remaining growth came mainly from the U.S., Canada, Brazil, Guyana, and Argentina.
Demand Patterns
- Global demand growth is slowing due to:
- The rise of electric vehicles (EVs), particularly in China (where EVs make up nearly 50% of new car sales).
- Sluggish post-COVID recovery in developed economies.
- Climate change commitments reducing fossil fuel dependence.
- The OECD countries (38 nations with nearly half of global GDP) now account for only 10% of the annual oil demand growth.
Divergent Forecasts
- OPEC’s outlook predicts a supply deficit of about 50,000 barrels per day by 2026.
- The International Energy Agency (IEA), however, anticipates a surplus of around 4 mbpd, signaling continued price weakness.
- Most analysts side with the IEA, expecting Brent crude to drop to $50–55 per barrel next year.
Positive Effects
- India’s oil import bill in 2024–25 was $137 billion.
- Each $1 drop in oil prices reduces the current account deficit (CAD) by approximately $1.6 billion.
- Lower import costs ease inflation and subsidy burden, improving fiscal stability.
- Savings allow the government to boost capital expenditure and stimulate growth.
- Reduced dependence on discounted Russian crude may also ease trade frictions with the United States.
Possible Downsides
- West Asian economies, heavily dependent on oil exports, may experience slowdowns, which could impact: Indian remittances, exports, and investments from the Gulf region.
Conclusion
The current oil price decline offers short-term economic relief to India through lower import bills and improved fiscal balance. However, as the oil market is cyclical, prices could rebound with any geopolitical shock or production cut.
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