Crude oil is a naturally occurring, yellowish-black liquid chemical mixture found in geological formations, consisting mainly of hydrocarbons. It is a fossil fuel formed over millions of years from the anaerobic decay of organic materials, particularly planktons and algae, which were subjected to intense heat and pressure under layers of rock and sediment. The term petroleum is often used interchangeably with crude oil, and its name literally means "rock oil".
Crude oil is recovered primarily by drilling into underground reservoirs and is then sent to a refinery where it is separated into various petroleum products like gasoline (petrol), diesel, kerosene, and jet fuel through a process called fractional distillation. The quality of crude oil is categorized as light or heavy based on its density (API gravity) and sweet or sour based on its sulfur content. Light, sweet crude is generally priced higher because it is easier to refine into high-demand products.
For India, which imports over 85% of its crude oil requirement, the concept is intrinsically linked to the Indian Basket of Crude Oil (IB). The IB is not a traded benchmark but a derived price, calculated as a weighted average of two main grades: Brent Dated (sweet crude) and the Oman-Dubai average (sour crude). This weighted average, calculated by the Petroleum Planning and Analysis Cell (PPAC) under the Ministry of Petroleum and Natural Gas (MoPNG), serves as the benchmark indicator for India's import costs and domestic fuel pricing.
Crude oil prices are a critical macroeconomic variable for India, as they directly influence the Current Account Deficit (CAD), inflation (both CPI and WPI), and the value of the Indian Rupee. A sustained $10 increase in Brent crude prices can widen India's CAD by around 0.5% of GDP. Recently, the composition of the Indian Basket has been reweighted to reflect the country's changing sourcing patterns, moving from a traditionally Middle East-heavy slate. For instance, the ratio for March 2026 was updated to 61.02% Brent-linked sweet crude and 38.98% Oman-Dubai sour crude, compared to an earlier mix that was heavily skewed towards sour crude. This change reflects India's diversification of imports, notably the sharp rise in discounted Russian oil, which made Russia the largest crude supplier starting in FY 2022–23.