How declining crude oil prices can boost India’s economy

EVEN as global discontent over the disruptive effect of Trump's tariff policies continues, little attention is being paid to a significant development in the world economy. This is the persistent decline in hydrocarbon prices over the past five months, mirroring the uncertainty caused by trade and tariff battles.Crude oil prices touched four-year lows in May and even now are ruling at $64.75 per barrel for the benchmark Brent crude. The outlook for the rest of the year continues to be bearish, with the oil cartel, OPEC Plus, having just decided to hike production for a third consecutive month after raising output quotas for May and June.In other words, more oil is flowing into the market at a time when demand is contracting as a result of recessionary conditions in developed economies and slackening growth in China. The combination of enhanced production and reduced consumption will likely ensure that prices continue to fall in the coming months.The softening of oil prices has already eased inflationary pressures in many parts of the world, including Europe. It is also a bonanza for an emerging economy like India that imports over 85 per cent of its fuel needs.Oil producers, especially in the US, however, are a worried lot. Though Trump declared soon after taking office that he would support the fossil fuel sector with the famous phrase "drill baby drill", his policies have led to falling share prices of energy firms. Shale oil companies, which enabled the US to emerge as the world's top oil producer, are the most concerned of all. The bearish trends in international markets have brought prices nearly to uneconomic levels for these firms. There will be little incentive to drill more in case prices fall beyond $60 per barrel.In addition, Trump's tariffs on steel imports are hurting new oil drilling projects, which will cost more due to higher costs for this metal. Another government directive to carry one per cent of natural gas exports in US-built vessels from 2029 onwards is apparently an impossible target. It turns out, none of the specialised vessels meant for transporting gas are built in that country. The American Petroleum Institute is reported to have informed the White House that it will not be possible to comply with the directive and has, therefore, urged for reconsideration of the plan.In the comedy of errors that seems to characterise Trump's energy policies, investments in this sector are actually slowing down rather than increasing as a result of uncertainty over his volatile tariff policies. OPEC Plus, which includes Russia and its allies, is also doing its bit to drive down prices in a bid to make production unremunerative for shale oil producers. While lower oil prices may be just what Trump had been calling for, the American oil industry clearly does not think the softening trends are beneficial in any way.In sharp contrast, the current scenario is bright for India, which is now the world's second biggest importer of crude oil, after China. The International Energy Agency (IEA) expects it to become the leading driver of global demand growth right up to 2035, adding nearly two million barrels per day to global oil demand. It will displace China, which has in the past driven world oil consumption but is now moving towards electric vehicles in the transport sector.The rising demand reflects the relatively rapid economic expansion, with rising urbanisation and industrialisation. But the higher crude oil consumption comes at a cost as most of the hydrocarbons are sourced from abroad. The economy is consequently sensitive to price fluctuations in the international oil markets. Every $10 rise in prices of crude oil widens the current account deficit (CAD) by 0.5 per cent. Conversely, a decline in prices can improve the CAD. The recent dip in prices, which is likely to continue for the rest of the year, is therefore bound to reduce the CAD. In turn, this will help the government contain the fiscal deficit at the FY 2026 target of 4.4 per cent.The sharp reduction in world prices will also ease inflation in the domestic economy, especially if retail prices of diesel and petrol are eventually brought down to commensurate levels. Latest data shows inflation touched a six-year low of 3.16 per cent in April, which indicates that cutting petroleum product prices will ease the situation even further. It will definitely help in containing seasonal price rises during July and August.Among the sectors that could benefit immediately by a fall in fuel prices are steel, cement, automobile and aviation industries as well as chemical-based industries, including paints manufacturers. At the same time, upstream oil companies like the ONGC and Reliance Industries will face stress as their output will be priced at lower levels.Lower oil prices will also make it possible to reduce the subsidies currently being given to oil marketing companies on products like LPG. Even now, the government has committed to compensate these companies to the tune of Rs 30,000 crore for past under-recoveries incurred on sales of this product.The current crude oil scenario is, thus, a silver lining to the volatility being faced on the tariff front. It is precisely the uncertainty over tariffs and international trade that has dampened sentiments and made the international oil industry jittery over making any fresh investments. OPEC Plus has contributed to the situation by increasing output at a time when demand is not at its highest.Yet, India cannot afford to be overly complacent over the continuance of a bear market in crude, given the persistence of geopolitical tensions. These could aggravate the situation and result in a price spiral, as had occurred at the outset of the Ukraine-Russia war. For the time being, therefore, the existing policy of diversifying supplies from a host of countries, ranging from Russia to the US to Iraq, must be continued to safeguard the economy from any energy crisis. Yet, with global markets poised to continue softening trends, it is apparent that hydrocarbon prices will give a booster shot to the economy in FY 2025-26.

How declining crude oil prices can boost India’s economy

Sushma Ramachandran

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