Why is India Competing With Saudi Arabia in Refined Crude Oil Product Exports

India expanding crude oil refining capacity for exports makes little economic sense since it imports almost all of its oil

(Photo: An oil rig in Russia, courtesy Wikimedia Commons.)

February 27, 2026

Earlier this month, United States President Donald Trump “agreed to remove the additional 25% tariff on imports from India in recognition of India’s commitment to stop purchasing Russian Federation oil.” As a result, India’s cost of oil imports will rise since it was previously buying Russian oil at a discount of $5 or more per barrel compared to Brent benchmark prices. Over the long-term, India could face a far more serious economic hit due to government policies.

In about a decade, there is a high probability that crude oil prices will be in a long-term decline, though there could be short-term spikes due to geo-political and other factors. Already, futures prices in the late 2030’s are far lower than the current $73 price per barrel, though on small trading volumes.

Prices are likely to decline because global oil demand is forecast to stay flat, perhaps drop, as more automobile owners switch to electric vehicles, especially in China. U.S. investment bank Goldman Sachs expects demand to peak in 2040 at around 113 million barrels per day, up from 100 million barrels today. Meanwhile, on the supply side, global recoverable oil reserves will remain abundant, more than 1,500 billion barrels.

A sustained drop in oil prices will result in major revenue declines for the Persian Gulf exporters. So, they will likely hire far fewer foreign laborers, including Indians. This will worsen India’s unemployment especially in Kerala whose economy depends on remittances from workers, mainly in the Persian Gulf, for about a fifth of its income.

However, a decline in oil prices could benefit India’s economy since it imports 90 percent of the 5.4 million barrels per day it consumes. In fiscal year 2025, oil imports totaled $140 billion and India’s merchandise trade deficit was $284 billion. But any benefits depends on the government pursuing a rational policy of importing only the quantity needed to meet domestic consumption. If this happens, it will help reduce the country’s merchandise trade deficit and foreign debt.

Almost all of India’s oil imports is refined domestically by government-run and privately owned companies. Their current annual capacity is 258 million metric tonnes. About a third of their refined output, mainly diesel, gasoline and aviation fuel, is exported. By 2030, Indian refiners plan to sharply raise annual capacity to more than 450 million tonnes, according to a government report.

Part of the new refining capacity is to meet rising domestic demand for transport fuel and other refined products. Oddly, the government also has ambitious plans for India to be a major exporter by replacing refining capacity which Western countries may shut to meet their green energy goals.

But basing a long-term industrial policy on what other governments may or may not do, and not on economic realities, is a speculative exercise which could hurt the Indian economy. Already, given recent slashing of green energy goals, by the Trump Administration and some other Western governments, there will likely be fewer shutdowns of refining capacity in the West than previous estimates.

By 2050, India’s oil consumption is forecast to nearly double to 9.2 million barrels per day according to a government report. Unless there is a major find of domestic reserves, which appears highly unlikely, India’s oil imports will jump to more than eight million barrels per day. So, even if prices drop, India’s oil import bill will likely rise, enlarging its trade deficit and foreign debt.

More important, as a high-cost producer of refined commodities, it makes little economic sense for India to sharply raise refining capacity to compete against low-cost Persian Gulf and Russian exporters. Saudi Arabian giant Aramco’s cost of a barrel of oil is between $2 and $10 and the average cost for Russian producers is $15. In contrast, Indian refiners pay $73 for each barrel they import, following the trade deal with the US. Also, since refining is an energy intensive operation, costs are higher in India. By 2035, even if oil prices decline by half and stay there long-term, the input costs for Indian refiners will remain far higher than that of their Saudi and Russian competitors.

As it is, competing against low-cost exporters of refined products is adversely impacting India’s foreign trade deficit. In fiscal year 2024-2025, the prices received by India’s refined product exporters was sharply lower. As a result, the value of such exports fell to roughly $44 billion in fiscal year 2025, less than half that in fiscal year 2023, even though volumes were a fifth higher, at 120 million tonnes.

Such sharp decline in prices implies that Indian companies exported some, if not all, of their refined products at a loss. This raises a question: is it the government-owned companies - which account for nearly two thirds of India’s refining capacity - who are exporting at a loss? Private companies will only export at a loss, if government subsidies and/or tax-benefits ensure they earn profit margins of at least 12%, which is typical for their sales in India.

Also, in addition to worsening trade deficits and estimated losses, expanding oil refining capacity will require more than an estimated $125 billion in capital investments. The Government of India will have to fund the investments since most of the expansion in capacity will be carried out by government-run companies.

Instead, the Indian government should use the capital to fund job training and job-creating businesses, especially in Kerala which will be worst hit by reduced demand for Indian labor in the Persian Gulf. For instance, India acutely needs a cold-chain to extend the life of vegetables, fruits, meat, food grains, dairy and other farm products. Expanding the cold chain will bring in far more export revenues than refined crude oil products since India is already a low-cost exporter of agricultural and food products. Also, it will help reduce the loss of food produce in India, given that more than a third of it is wasted, an estimated annual loss of $26 billion.

Will the Government of India abandon plans to make India a major exporter of refined crude oil products where the country has no economic advantage?