Source: The post OPEC policy shift may hurt India in long run has been created, based on the article “The ongoing oil price tensions” published in “The Hindu” on 20 May 2025. OPEC policy shift may hurt India in long run.
UPSC Syllabus Topic: GS Paper3- Infrrastructure
Context: A silent yet crucial conflict has emerged in the global oil market after OPEC+ announced on May 3 a gradual rollback of earlier production cuts. This strategic shift signals the beginning of a new oil price war, with far-reaching implications for major importers like India.
OPEC+ Policy Shift and Triggers
- Reversal of Production Cuts: In 2023, OPEC+ imposed voluntary cuts of 2.2 million barrels per day (bpd) to boost prices. Since early 2024, the group has reversed 960,000 bpd of these cuts over three rounds, with plans to fully unwind them by October 2025.
- Market Reaction to Increase: The May 3 decision led to a 2% drop in Brent crude prices, falling to $60.23 per barrel—the lowest since the pandemic. Prices recovered to $65 with support from a U.S.-China trade deal and nuclear talks stalling between the U.S. and Iran.
- Weak Post-COVID Demand: Global recovery after COVID was uneven, with slow demand growth. Meanwhile, new producers like Brazil and Guyana entered the market, worsening the supply-demand gap. OPEC+ initially responded with a five million bpd cut, which proved ineffective.
Saudi Arabia’s Strategic Shift
- Discontent with Overproduction: Saudi Arabia, bearing 40% of total cuts, saw its 2024 production drop below nine million bpd—its lowest since 2011. Other members like Iraq, Nigeria, and the UAE exceeded quotas, prompting frustration.
- History of Market Share Tactics: The Kingdom has used market flooding strategies before—in 1985-86, 1998, 2014-16, and 2020—to punish overproducers and reassert discipline within OPEC+. This tactic has previously helped restore desired prices.
- Reigniting Price War: With diplomatic efforts failing, Riyadh opted to restore production rapidly, launching what appears to be a price war disguised as a policy shift, aiming to reassert control.
For detailed information on Saudi Arabia uses oil policy for diplomacy read this article here
Shifting Dynamics in Oil Market
- Fragmented Producer Base: Unlike earlier times, the current market is crowded with independent producers. Heavy investments in costly offshore and marginal fields require continued output to avoid political fallout.
- Declining Demand Growth: The International Energy Agency (IEA) projects only 0.73% oil demand growth in 2025. Factors like EV adoption in China, climate commitments, and a global slowdown support the “peak demand” outlook, once seen as unrealistic.
- Global Economic Weakness: S&P forecasts global GDP growth at just 2.2% in 2025 and 2.4% in 2026. The WTO predicts a 0.2% decline in global trade in 2025, limiting demand recovery even if supply tightens.
Saudi Arabia’s Broader Calculations
- Revenue Maximization Strategy: Anticipating long-term stagnation, Saudi Arabia may be frontloading oil sales to maximize earnings before sanctions on Russia, Iran, and Venezuela are lifted and U.S. production rises under Trump’s “Drill, Baby, Drill” push.
- Political Coordination with U.S.
The timing also coincides with President Trump’s planned visit. Saudi Arabia may be signaling alignment with U.S. goals of low oil prices to counter inflation, in exchange for defence deals, nuclear cooperation, and arms sales worth over $100 billion.
India’s Position and Challenges
- High Import Dependence: India, the world’s third-largest crude importer, spent $137 billion on oil in 2024–25. Its demand rose by 3.2%—almost four times the global rate—and is expected to be the main growth driver till 2040.
- Short-Term Benefitsx A $1 fall in crude prices saves India $1.5 billion annually. Lower prices ease inflation and reduce fiscal burdens.
- Long-Term Risks: Lower oil revenue in Gulf nations could reduce trade, investment, and tourism. Remittances from nine million Indian expatriates in the Gulf—over $50 billion—may decline. Refinery margins and tax revenues may also fall.
Need for Diversification: Unless India reduces hydrocarbon dependence, reduced economic synergy with oil economies may become the “new normal.”
Question for practice:
Examine how the recent OPEC+ policy shift and Saudi Arabia’s strategic response may impact India’s economy in both the short and long term.
