Why in the News?
In May 2025, Saudi Arabia led OPEC+ to reverse previous production cuts, sparking a full-fledged oil price war—a new form of global conflict fought aggressively over barrels of crude oil rather than through military aggression.
What is OPEC+?OPEC+ is a group consisting of the Organization of the Petroleum Exporting Countries (OPEC) plus several non-OPEC oil-producing countries that coordinate their oil production policies to manage global oil supply and influence prices. Key points about OPEC+:
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What led OPEC+ to increase oil production in May 2025?
- Ineffectiveness of previous cuts: Despite voluntary output cuts of 2.2 million barrels per day (bpd) by eight members in 2023 (including a collective cut of 5 million bpd earlier), oil prices kept declining.
- Oversupply & competition: New producers (e.g., Brazil, Guyana, shale oil players) increased their market share, reducing OPEC+’s control.
- Saudi frustration: Overproduction by OPEC+ members like Kazakhstan, Iraq, UAE, and Nigeria undermined collective output discipline.
- Market flooding strategy: To discipline overproducers and regain market share, Saudi Arabia led a reversal in strategy, increasing output (411,000 bpd) starting June 2025.
- Preemptive move: Anticipating return of major sanctioned producers (Iran, Venezuela, Russia), OPEC+ may be frontloading production before supply increases further.
Why is Saudi Arabia called a “swing producer”?
- Large spare production capacity: It can increase or decrease output swiftly to influence global oil prices.
- Stabilizing role: Prefers stable and moderately high prices to ensure consistent oil revenue.
- Historical precedence: Has previously launched price wars (1985–86, 1998, 2014–16, 2020) to discipline the market and punish overproducers.
- Current context: Took the largest voluntary cut (3 million bpd) in 2024, but shifted to increasing output as a strategic move to reassert influence.
Who are the key oil producers under U.S. sanctions?
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How does the oil price war affect India’s economy?
- Lower Import Bill and Fiscal Savings: Falling oil prices reduce India’s import costs significantly. Eg: In 2024–25, India spent $137 billion on crude imports. A $1 drop in global oil prices can save India roughly $1.5 billion annually.
- Reduced Export Earnings from Petroleum Products: India exports refined petroleum products, a top export item. Lower crude prices reduce global demand and margins for these exports. Eg: Refinery margins decline, affecting companies like Reliance Industries and Indian Oil Corporation, and reducing foreign exchange earnings.
- Negative Impact on Gulf Economies and Remittances: Gulf countries face revenue drops, leading to reduced infrastructure spending and job losses for Indian expatriates. Eg: Over 9 million Indians work in the Gulf, sending home more than $50 billion in remittances annually. Job losses or salary cuts can hurt India’s balance of payments.
- Lower Tax Revenues from Oil Sector: As oil prices drop, the government earns less in excise duties, royalties, and other taxes from oil and gas sales. Eg: The petroleum sector contributes significantly to India’s tax base—lower prices reduce collections, affecting fiscal planning and public spending.
- Strained Bilateral Economic Ties with Oil Exporters: Economic decline in oil-exporting countries (like Saudi Arabia, UAE, and Nigeria) affects India’s project exports, bilateral trade, and inbound investments. Eg: Indian companies working on infrastructure projects in Gulf countries may face payment delays or cancellations due to budgetary constraints in host nations.
Way forward:
- Diversify Energy Sources and Boost Renewables: Reduce dependency on crude oil imports by accelerating adoption of renewable energy, energy efficiency, and alternative fuels like hydrogen and biofuels to enhance energy security.
- Strengthen Economic Resilience and Diplomatic Engagement: Build strategic petroleum reserves, improve fiscal buffers, and deepen diplomatic ties with diverse energy suppliers to better manage supply shocks and geopolitical risks.
Mains PYQ:
[UPSC 2013] It is said the India has substantial reserves of shale oil and gas, which can feed the needs of country for quarter century. However, tapping of the resources doesn’t appear to be high on the agenda. Discuss critically the availability and issues involved.
Linkage: It focuses on the potential of unconventional sources like shale oil/gas within India, which could impact its energy security and reduce dependence on imports influenced by global price tensions.
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