I rather doubt that, given the state of Minas Tirith, preparing for a siege, there would have been the time or resources to make enough blasting powder to destroy the entire city, or even a significant portion of one level. Its introduction into the war against Sauron, however, could have had interesting results, making the West appear more powerful than he had anticipated, and possibly forcing him to push his war even sooner and more strongly than he had intended. Perceiving that Saruman, the developer of the powder, had turned against him and was cooperating with his enemies would, I think, have been of significant concern to him, never mind that Saruman's "magical" powers were (apparently) inhibited by the surrender of his staff.
In any case, I do think that if Saruman, having lost all but the strength of Orthanc as a refuge, agreed to submit to Gandalf, it would have required at least a partially genuine change of heart. Depending on how things went, I can see a number of possible outcomes.
If he behaved in a suspicious manner (which could range from being shifty to being overly obsequious), he might require so much of Gandalf's supervision that Gandalf would not be free to do some crucial things during the siege -- rescue Faramir and hold the Gate against the Witch King, for instance. It could have some very bad results.
On the other hand, if Saruman didn't require incarceration in Orthanc, I suppose there could be an outside chance that some of the more "hasty" Ents might be persuaded to join in the fight against Sauron. If not in Gondor, I could see some of them going to Lothlorien to help out there, which might draw Sauron's attention even farther from Frodo, dividing the war into two fronts.
Which might also be a good place to send Saruman, as long as he and his staff remained in separate places. Galadriel's attitude toward him (as well as her possession of one of the Three) might make her a very effective "parole officer."
But if Saruman's surrender was genuine, he might well confess to what he had instigated in the Shire. If he was honest with himself, and felt that going to Gondor would place him in danger of falling back into evil ways (which it well could, there being the temptation of another palantir), or put him too close to Sauron and his revenge for comfort, he might be willing to go to the Shire, take control from the ruffians, and put things back in order. It would, of course, require a true change of heart, which I think is something that would have to occur in order for Saruman to surrender to Gandalf in the first place.
Just a few random thoughts.
