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23 Oct 2025 : The tailwinds from lower global oil prices

 Editorial 2: ​The tailwinds from lower global oil prices

Context

However, the respite for India may prove temporary, as the oil market’s cyclical nature often reverses gains swiftly.

 

Introduction

Among current global developments shaping India’s interests, attention often turns to the conflicts in Gaza or Ukraine or the U.S. tariff wars. Yet, a far more consequential contest is emerging as the battle for control of the global oil market. This struggle between OPEC+ and other oil producers, with consumers gaining greater influence, will critically determine how much India, the world’s third-largest oil importer, stands to benefit.

 

Global Importance of Crude Oil

  • Crude oil remains the world’s most valuable commodity, forming the backbone of modern industrial and transport systems.
  • Over 100 million barrels per day (mbpd) are produced globally, with nearly half of this volume traded across international markets.
  • At current prices, the daily value of global crude trade exceeds $3 billion, underscoring its vast economic scale.
  • Beyond being a key energy and petrochemical input, crude oil also serves as a critical financial asset, influencing global liquidity, trade balances, and capital flows.

 

Global Oil Market: Technology and Demand Shifts

  • Over the last two decades, technological advances and economic changes have had a bearish impact on the global oil market.


1. Technological Drivers

  • Shale oil extraction, horizontal drilling, and deep-sea exploration have expanded production capacity.
  • These breakthroughs increased supply from non-traditional regions, contributing to persistent oversupply and downward price pressure.

2. Demand-Side Transformation

  • Global demand growth is nearing its peak, with strong divergence between regions:
    • Developing economies (Global South): Moderate growth from a low consumption base.
    • Developed economies: Stagnant fossil fuel demand due to weak post-COVID recovery, climate policies, and rise of EVs.
  • In 2025, oil demand is projected to grow by 1.3 million barrels per day (1.2%), with only 10% of that growth from OECD countries (which account for 46% of global GDP).
  • China, the world’s largest oil importer, faces slower consumption as EVs reach 50% of new vehicle sales and economic growth moderates.

3. Surge in Supply

  • Global production rose by 5.6 mbpd compared to last year:
    • OPEC+ contributed 3.1 mbpd as it reversed COVID-era cuts.
    • Additional supply came from the U.S., Canada, Brazil, Guyana, and Argentina.
  • This rise has created a clear supply overhang in the market.

4. Price Movements and Market Adjustments

  • Brent crude stands at $61 per barrel, marking a 16% fall since the start of the year.
  • Nearly half of this fall occurred in the past month, showing a sharp recent decline.
  • The fall was partly cushioned as:
    • Consumers refilled strategic reserves at lower prices.
    • Producers stored over 100 million barrels on floating tankers to avoid flooding the market.

 

Global Oil Market Trends and Outlook

  • Despite major geopolitical disruptions such as the China–U.S. tariff war and Ukrainian drone attacks on Russian hydrocarbon facilities, oil prices have continued to decline.
  • The emerging supply glut has created tensions within the OPEC+ alliance:
    • Saudi Arabia, the leading exporter, wants to end production cuts early to regain market share and recover lost revenues.
    • Russia, under strict export sanctions, advocates a slower, more cautious approach to avoid further losses.
  • A sharp disagreement exists between OPEC and the International Energy Agency (IEA) over future supply-demand trends:
    • OPEC forecasts a shortfall of 50,000 barrels per day (bpd) by 2026.
    • IEA predicts an oversupply of nearly 4 million bpd (mbpd), indicating a possible price collapse.
  • Most global think-tanks support the IEA’s assessment, expecting an oversupplied market and Brent crude prices dropping to the low $50s per barrel, a 10–20% decline from current levels.
  • The volatile oil market remains vulnerable to geopolitical shifts, including:
    • The lifting of sanctions on Russia, Iran, and Venezuela,
    • Renewed West Asian tensions, or
    • Trade de-escalation between major economies.
  • The IMF’s World Economic Outlook (Oct 2025) describes the global economy as “in flux”, warning of dim growth prospects:
    • Global GDP growth is projected to slow to 3.2% in 2025 and 3.1% in 2026.
    • World trade growth expected to fall to 2.9% (2025–26) from 3.5% (2024).
  • These macroeconomic and geopolitical trends collectively indicate a downside risk to global oil prices in the coming years.

 

Impact of Falling Oil Prices and U.S. Dollar on India

1. Overall Economic Impact

  • The simultaneous fall in oil prices and the U.S. dollar is expected to have a net positive effect on India’s economy.
  • In 2024–25, India’s oil import bill stood at $137 billion.
  • Every $1 decline in oil price improves India’s current account deficit (CAD) by $1.6 billion.

2. Fiscal and Inflationary Effects

  • Lower oil prices reduce both the subsidy burden and inflationary pressures.
  • The government retains much of the savings, leading to an improved fiscal balance.
  • Enhanced fiscal space allows higher capital expenditure (CapEx), giving a boost to growth.

3. Geopolitical and Trade Implications

  • The oil glut could lower India’s dependence on discounted Russian crude, thereby reducing the tariff frictions with the United States.
  • However, a slowdown in West Asian economies may weaken remittances, exports, and investments.

4. Caution and Policy Outlook

  • The global oil market remains highly cyclical — current relief may be temporary.
  • India should continue to pursue energy efficiency, diversification, and consumption-mitigation strategies to ensure long-term stability.

 

Conclusion

While lower global oil prices offer India short-term fiscal and inflationary relief, the advantage is inherently fragile. The cyclical nature of oil markets, combined with slowing global growth and geopolitical volatility, may quickly reverse current gains. Sustained resilience will depend on India’s commitment to energy diversification, efficiency reforms, and strategic investments in renewable capacity.