Today, an additional 25% tariff on all Indian exports to the United States should come into effect, making the total tariff owed by importers of Indian goods around 50%. The additional tariff aims to discourage Indian energy importers from buying Russian oil. And it could hurt the U.S. economy—although U.S. oil producers would welcome the price change.
Russia has emerged as the largest single supplier of crude oil to India, which imports some 85% of the oil it consumes. Because of that, it is quite partial to a good bargain. Russian crude is just such a bargain due to the discount resulting from Western sanction pressure.
Importantly, the United States under Biden had zero problem with India becoming a major oil customer of Russia. In fact, the Biden admin asked India to step up its Russian oil purchases following Russia’s 2022 incursion into Ukraine and the consequent start of sanctions. As then Treasury Secretary Janet Yellen told Reuters back then, Russian oil “is going to be selling at bargain prices and we’re happy to have India get that bargain, or Africa or China. It’s fine.”
Of course, less than two years later, Yelen stopped seeing the continued exports of Russian oil as fine because Moscow kept making money from these flows, but it was too late to change things without hurting the U.S. economy as much as the European one had already hurt itself.
The goal of that Biden admin move was to keep Russian oil flows constrained but not blocked to avoid a price spike—which nevertheless happened but did not last for very long. Yet it still pushed oil companies’ profits sky-high. This is why the U.S. oil industry is probably rooting for the tariff push to backfire.
Energy Aspects’ Amrita Sen explained in a recent op-ed for the Financial Times how the backfiring would unfold. India is currently importing Russian crude at a rate of some 1.6 million barrels daily, as of the first half of this year, per Energy Information Administration data cited by CNBC. There is no other oil buyer of such size in the world, so if the U.S. pressure campaign begins in earnest and Indian refiners and the government yield, that’s 1.6 million barrels daily that may well have nowhere else to go because of sanctions, so they would be effectively removed from the market.
Now, despite all the talk about a “bloated” supply situation, the oil market appears to be, in fact, constantly on the verge of a shortage, so the loss of those 1.6 million barrels daily will push prices higher. Just how high will depend on just how much of that oil would indeed be cut off from the market. China is the most obvious alternative destination for Russian barrels, but here’s the thing: China cannot absorb a lot of additional oil, according to Energy Aspects’ Sen.
“China does not have the refining capacity to absorb significantly higher volumes of Russian oil than they used to buy. Thus, geographically India became the logical clearing country for the Russian barrels,” the energy commodity analyst wrote in her FT op-ed.
So, with those barrels effectively gone, prices will shoot up, raising the question of how much President Trump is willing to risk to make India play ball.
The answer is yet to be revealed, but it may well be the risky nature of Trump’s additional tariff move that has given India the confidence to repeatedly state it has no plans to change its oil-buying habits. Prime Minister Modi said it early on in a rather sharp response to Trump’s initial threat of additional tariffs. The Indian ambassador to Russia said it twice in the past week, emphasizing the bargain factor. “Indian companies will continue buying from wherever they get the best deal,” Vinay Kumar said this weekend.
Despite reports emerging that Indian refiners were trimming their purchases of Russian crude in the last couple of weeks, there have also been reports detailing the continued buying of sanctioned barrels. There is also the additional factor of geopolitics, or, more specifically, Russia’s long-running relationship with India.
“Russia has been a close strategic partner of India since the 1970s and the Trump administration’s tariff threats are not going to change that,” Daniel Balazs from Singapore-based defense think tank the S. Rajaratnam School of International Studies told CNBC.
In fact, Trump’s tariffs may push the two countries closer together—and closer to China. That’s hardly something that would sit well with the current host in the White House and his team.
Once again, Western leadership finds itself at a difficult crossroads: let oil trade continue as normal or deal with higher oil prices. As Energy Aspects’ Sen summed it up,
“Western leaders continue to use energy as a foreign policy tool — but are not ready to face the true consequences of sanctions tightening.”