Favourable impact

US President Trump’s visit to Saudi Arabia and other Gulf countries is being watched with increased anticipation. It has also fuelled hopes that Trump may request Qatar to prevail upon Iran to make concessions on the nuclear front to ease sanctions from the US, which are currently

throttling its economy. If this happens, and the much-anticipated meeting between Russia and Ukraine results in a cessation of hostilities, sanctions on Russia may also be eased.

While these talks are still to take place, what it does mean is that global markets could soon be awash with crude from both Iran and Russia. Iran is the fourth-largest oil producer and the second-largest gas producer in the world. Russia’s proven oil reserves currently make it the fifth-largest, with several areas yet to be exploited.

Given the huge influx of crude and gas, there is every possibility that crude prices may fall well below $60 per barrel, which is the current prevailing price. It is true that lower prices may dampen US oil drilling prospects from shale, as it may become uneconomical, but cheaper crude will also help the US in easing inflationary pressure. This, in turn, will help the US make a case with the Treasury to ease overall interest rates.

With supplies outstripping demand in the immediate short term, lower crude prices will benefit large importers like India. India’s total crude oil imports in FY’25 are estimated to be around R11.60 lakh crore. Even a 10 per cent decline in prices will see savings to the tune of R1 lakh crore, assuming demand does not fall. India will be doubly benefitted, as a lower outgo on imports will reduce its import bill and significantly shrink its yawning trade deficit.

The lower crude oil prices will ensure a windfall for the government. However, it should ensure that lower crude prices do not impact its ethanol blending programme. In April 2025, ethanol blending in petrol stood at 19.7 per cent, while the overall blending from November 2024 to April 2025 was 18.6 per cent. The government should continue with the ethanol blending programme, even if it means incurring a small loss. The aim should be to gradually increase ethanol, which is increasingly being produced from waste vegetables and grains, in addition to sugarcane bagasse.

Integrated Indian refiners will benefit from lower import costs and stable prices of end products, which will more than compensate for the lower cracking margins on crude. The losers will be the E&P companies, who may have to contend with lower output prices, especially from their overseas assets.

India must also ensure that it uses the lower prices to shore up its strategic reserves and, if required, build additional caverns to increase the reserve buffer.

It is unlikely that the government will pass on the benefits of lower crude prices to consumers in the short term. Instead, the surplus may be used to bolster defence capabilities.

While the public at large may not object to this in the short term, if the downward trend in prices continues, they would

expect to share in the benefit. Equity demands that oil refiners also demonstrate their willingness to share some of the profits with consumers.

For a long time, consumers have had to suffer from the quixotic policies of state governments, which have used petrol and diesel as milch cows to fund largesse to voters. Besides VAT, imposing fixed prices on petrol greatly increases the overall cost. There is a need to establish a uniform VAT pricing policy across all states and to do away with variable fixed-price tax. Until a uniform GST is introduced to ensure price parity among states, the Centre must build a consensus on having a standard VAT levy.

The state governments tend to forget that the middle-class voter base, which is also growing fast, will soon form the bulwark of their vote bank. Unless given a fair deal, their loyalty may shift towards a government that promises to treat them more equitably.

Until such time as changes are made in state taxation policies, the likely beneficiaries of lower crude prices will be Indian corporates – particularly those using downstream petroleum products as raw materials, as well as companies importing these products for further processing. These prices will necessarily align with import prices and not be overly dependent on government-fixed rates.

India will still benefit from the prevailing low crude prices until sanctions are lifted.