In one of his more controversial decisions last week, President Trump said the U.S. would impose an additional 25% on many Indian imports—because of India’s imports of Russian crude oil. The news lifted oil prices, and Indian refiners suspended their Russian oil orders. But the bigger picture shows India at a crossroads not dissimilar to that of the EU: a choice between cheap and expensive energy with all that either option entails.
On the face of it, the choice is pretty simple, as laid out by the Economic Times in an article that noted India exported $87 billion worth of goods to the United States while its oil import savings from Russian crude stood at a much smaller $3.8 billion. The United States is India’s largest trade partner.
The article quoted ING’s commodity analysts head Warren Patterson as saying that “If you look at the size of India’s trade with the US, and look at how much savings India gets from buying Russian crude, it’s pretty clear what India would do. Are you going to risk up to $87 billion worth of exports to the US in order to save a few billion from oil discounts?”
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Judging by the reaction of New Delhi to Trump’s tariff announcement, they are willing to risk up to $87 billion in exports. Of course, this may change, but right now the Indian government is signaling it will not take orders from a foreign entity on where to buy its oil from. This is because it is not just “a few billion from oil discounts”. It is a matter of necessity to keep those export goods competitive—by buying cheap energy instead of expensive alternatives.
It appears that the savings India makes by buying discounted Russian crude are not such a meagre sum. According to another recent Economic Times report that cites data from the State Bank of India, the country’s oil import bill could swell by $9 billion this fiscal year and by another $11 billion in the next fiscal year. This is still substantially lower than the $80-billion U.S. export bill for 2024, per data from the International Monetary Fund cited by Reuters’ Gavin Maguire. But if India stops buying Russian crude, international prices will spike and so will India’s oil import bill—compromising its energy security in the financial aspect.
“Joe Biden went to India after the invasion of Ukraine and begged them to take Russian oil, the Indians hardly imported any Russian oil, and they begged India, ‘please take the oil,’ so that crude prices would remain low, and they did. Now we’re flipping around and saying, ‘why are you taking all this oil,’” the president of Rapidan Energy Group, Bob McNally, told CNBC recently in what is a timely reminder of the literal global nature of oil markets and prices.
If India should decide to comply with President Trump’s latest threat, around 1.7 million barrels daily of Russian crude would effectively be removed from the market. This is the average rate of imports into India, for which there is no alternative buyer of comparable size. It may seem that this is a win for the U.S. and Europe in their sanction push that aims to decimate Russia’s energy export income, but it will boost oil prices—and Trump likes oil prices lower rather than higher.
So do Indian refiners, which means they will not be scrambling to get their hands on every last available U.S. crude cargo. They will, according to analysts, switch back to Middle Eastern oil instead, as they did before they started importing Russian crude. This is what Reuters’ Maguire suggested in his recent column on the topic, and it is the most likely scenario in light of India’s still overwhelming reliance on imports when it comes to securing the crude oil it needs, at over 85%.
Total Russian oil export losses could top 2 million barrels daily if Trump decides to go through with his secondary tariffs on all Russian oil importers. That would likely prompt Turkey to stop buying Russian crude, The National’s Robin Mills wrote earlier today, bringing the total level of oil trade disruption to over 2 million bpd.
Yet this is about the same amount that OPEC+ is currently returning to market, so all should be well. Or so it seems. Because OPEC+ is not returning all the barrels it said it would for reasons related to capacity constraints. What’s more, the loss of discount Russian oil would mean switching to costlier alternatives for the countries that choose to make the switch. That sounds like a pretty bullish scenario for oil—President Trump would hardly like it given his fondness for lower oil prices. Incidentally, if Indian exports become too expensive for their U.S. buyers, those buyers would have to look for cheaper alternatives elsewhere. That would be quite a challenge.
By Irina Slav for Oilprice.com
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