Mint Primer: Donald Trump has tanked oil prices too

How have oil prices moved?

Last week, oil prices fell sharply after US president Donald Trump announced his reciprocal tariffs and China retaliated with its own tariff hikes. The benchmark Brent Crude fell 11% to close at $64.62 per barrel on Friday. The decline continued on Monday, and the commodity was seen trading at lower than $63 levels—a four-year low. On 1 April, it was trading at the $69-level. The recent sharp fall was preceded by a year of gradual decline in prices. Brent crude in early April 2024 was changing hands at $92 per barrel (see chart). In the space of just 12 months, it has declined by as much as 29%.

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What triggered the fall in prices?

It is a double whammy, with both demand and supply sides set to take a hit. Trump and his tariffs have unleashed the possibility of a full-blown trade war that threatens global economic growth. The US may well slip into a recession. The International Energy Agency (IEA), in March, predicted oil demand at 103.9 million barrels per day (bpd) in 2025. That now appears optimistic. IEA had originally estimated oil supply at 103.3 million bpd. But this was before OPEC+ (the Organization of Petroleum Exporting Countries) decided to increase output from May. Trump has also ensured that US oil production is at its peak.

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What is the near-term outlook?

IEA says global oil supply this year is set to exceed demand by almost a million bpd. The demand-supply gap is such that any revival in oil prices looks remote. The global energy watchdog has also warned that macro-economic conditions have deteriorated over the past month as trade tensions escalated between the US and other countries.

How does this impact India?

Low oil prices are obviously good news for India, given that it imports 85% of its oil needs.A lower import bill, in turn, would improve the trade balance or current account deficit (CAD). Lower CAD will ensure the rupee does not weaken further. Low oil prices, if passed on to the consumers, will reduce inflation. It will also ease the government’s finances by trimming the fuel subsidy and reducing its borrowings. If the government borrows less, it sets the stage for interest rates to fall.

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Are consumers likely to see a fuel price cut?

The sharp fall in crude oil prices has increased the expectations of a fuel price cut. Retail fuel prices were last cut in March 2024, just before the Lok Sabha elections. But on Monday, the government increased the excise duty on petrol and diesel by ₹2 per litre to take advantage of falling oil prices and mop up additional revenue. The excise duty increase will be borne by oil companies and will not be passed on to the consumers. The petroleum minister indicated that consumers would have to wait a little longer for a price cut.