North Korea and its effect on oil price By STEVE AUSTIN for OIL-PRICE.NET, 2013/04/29

Deja vu. The more things change, the more they remain the same, don't they? Take North Korea, for instance. If the ascension of Kim Jong-un promised change, it -alas- wasn't meant to be. A liberal education in the West or the luxury of a younger age or passion for modern gadgets couldn't nudge Kim Jr. to lead his country to modernity. Forget pragmatic small steps to prosperity, if anything, the new Kim turned out to be more belligerent than his father.

So, when relentless Kim Jong-un makes news with announcements of nuclear tests/missile tests do you run to check the oil prices? Well, many do. There is a widespread assumption that tension in the Korean peninsula makes the oil prices tipsy. After all, markets, as well all know, are crazy. Any news of any tension in any part of the world is enough for the speculators to push up the price of oil. The poor consumer.

For good reasons, we know the effects of Iran's rhetoric on oil price, the repercussions caused every time Iran saunters into the news, but does North Korea have what it takes to pull oil prices northward? Should you worry when war statements clog the Korean air? Simple answer: No. Next time you hear of war cries in the Korean peninsula, you don't have to be anxious over oil and its price. The reason is uncomplicated: North Korea isn't a major oil-producing country. There you go- myth busted. According to EIA, total oil production in North Korea in 2012 was 90 barrels per day. In contrast, Saudi Arabia produced almost 11.6 million bbl/d of total petroleum in 2012. Naturally, North Korea, as of today, can't influence oil prices the way Iran can.

Hard to believe? Check the facts. Oil prices have been on the long journey southward since February. Early this week, Brent crude went below the $100 mark, the first time in almost nine months. All this even as a recent report from the IMF stated improvements in the world economy. If North Korea was such an important player, oil prices would have gone through the roof.

To the question of nuclear weapons: An advanced nuclear program, and North Korea can cause serious damage. However, what the present Kim inherited from his father is the bogey of a nuclear state. Almost every month we get announcements of nuclear tests from North Korea. Underground nuclear test? Bah. What about the missiles? For the missiles to carry a nuclear warhead, they need nuclear weapons, don' they? Bah. Compared to Iran, North Korea's nuclear weapons are still in the kinder garden stage of development. Yes, it does tests missiles but those tests hardly cause a ripple. Then there's Iran, where any sneeze shakes markets around the world. Why? Plenty of reasons.

For a start, Iran has oil. Iran has the world's third largest reserves of oil, enough to last a century. Thanks to an oil field it shares with Iraq, production has increased by 5,000 barrels a day. According to latest figures, the country's current oil production stands at 4.2 million b/d.

Also, Iran has the Strait of Hormuz. Readers of oil-price.net would be aware of the huge importance this strait plays in the field of oil. Stated as the world's most important 'oil choke point' by the US Energy and Information Administration, Strait of Hormuz is a shipping route which connects Persian Gulf to the Arabian Sea and Gulf of Oman. So why is this so important? Almost 17 million barrels of oil pass through this strait every day. In other words, almost twenty percent of world's traded oil and thirty-five percent of all seaborne traded oil, making it a major choke point for maritime trade. As it is just 21 miles wide at the narrowest spot, Iran can block the strait disrupting the flow of oil. Even a day's block can disrupt oil supplies. For that matter, Iran uses the strait every time it wants the world's attention.

Back to Korea: North Korea is alone in its battle. Its only ally China is retreating from the scene. China is the single largest trading partner of North Korea helping the country with coal, oil, medicine and other essential commodities. Half of imported food in North Korea comes from China. In fact, North Korea imports almost eighty percent of oil from China. As part of an aid program, on a monthly basis China exports 50,000 to 300,000 tonnes of crude oil earning it more than $370 million. In 2012, China exported 523,041 tonnes. In spite of being such a close ally, last February, China did not export any oil to North Korea in the month of February. To put in some perspective, China didn't export crude to North Korea in 2012 either. This time though, China has voted in favor of more sanctions against North Korea in the UN Security council. As well.

Iran, on the other hand, isn't alone. North Korea is cut off from the rest of the world. Iran is smarter and knows how to play the trump card. One has to factor in the religious aspect too. Iran with its version of Islam can summon fighters true to its cause at any point of time. Further, Korea's educational system is no match to Iran's. Iran can still produce and send abroad large numbers of scientists, technocrats and economists, some of which teaching in the world's most best universities. North Korean people don't even have the luxury of mobile phones. Iran has money, oil, friends and a strong economy. North Korea takes to threats almost every other day. Iran does too but it backs it up with tangible points of attack.

The US knows that Iran can cause serious damage. But North Korea? The US doesn't even care for any more talks. The secretary of state John Kerry has stated that there would be no 'artificial talks' with North Korea. In a marked departure, China, has warned the country stating that "no one should be allowed to throw a region and even the whole world into chaos for selfish gains".

How much will China's change in attitude hurt North Korea? Too much. The already ailing economy would disintegrate should China stop its aid. Yet there's another side to the story. A nation named North Korea is in the interest of China too. Tension in North Korea helps it avoid attention to itself. Take off North Korea and China comes in direct line of US attack for its dismal human rights record. Hence, a nation named North Korea will survive for some more time.

While China distances itself from North Korea, Iran has been cozying up with the disctatorship and is currently in talks about exporting Iranian oil to North Korea, which the Asian power desperately needs. Although North Korea may be short on Dollars or Euros to pay for Iranian oil, it has other means to afford it as you have guessed: nuclear technology and materials. Stay tuned for more.