Axis Of Oil

Via Forbes, an interesting report on the petroleum-based relationship between India and North Korea.  As the article notes:

“…North Korea has found a new tap for its petrol thirst and at the same time a surprisingly significant trading partner–India.

Bilateral trade between the two countries increased from an average of barely $100 million in the middle of the past decade to $1 billion in 2009, according to the Confederation of Indian Industry, a trade organization. Of the latest figure, $940 million was what India exported in refined petroleum products.

The commercial tie has no deep historical roots and is a bit ironic given the record of Pyongyang’s connection to the AQ Khan nuclear enterprise in Pakistan, plus its closeness with India’s rival China.

North Korea needs oil to keep power plants going as well as to keep its outsized military on the move. It has enough hard-currency reserve from its murky export trade to purchase from the spot market. Yet it appears push has had as much to do with this as pull. Private Indian producers have ramped up refining but got ahead of their domestic market. Further, Indian policy, by until recently keeping an artificial lid on pump prices, encouraged these oil sector producers to look for clients overseas.

“India is the largest exporter of refined products east of the Suez [meaning the Middle East and Asia],” says Fereidun Fesharaki, chairman of Facts Global Energy in Singapore. A lot of the enhanced supply came online in 2009, predominantly from Reliance Industries, which has the world’s largest refinery, and the Essar Group. “India needs 15 years of demand to absorb this current supply,” he adds.

Up until June the government of India kept a cap on domestic gasoline prices (because of which it’s run up a $10 billion subsidy bill, or roughly 7% of its budget). State-owned companies were compensated for their losses. Those in the private sector were on their own, causing them to look for other markets, especially since the price for crude products has almost doubled, from $41 to $78 per barrel since 2004. “Their incentive is [to find] who in the world is desperate enough that it will take the products, and it’s usually Iran or North Korea,” says Fesharaki. “And since North Korea has a very limited refining capacity, they go to the people with the extra products to sell. Indian companies have been exporting very opportunistically.”

Some North Korea watchers are surprised by the uptick in economic relations. “I was flabbergasted by the increase in trade,” says Stephan Haggard, director of the Korea-Pacific Program at University of California, San Diego. “For North Korea that’s a two-digit share of their total trade. That’s not small.”

However, neither Reliance nor Essar (or any other oil refiners) exports fuel to North Korea directly. That’s too much of a risk politically (even though this trade isn’t barred under UN sanctions on the North) and economically, as Pyongyang has been known to slip on its payments. Instead, the fuel is sold through a network of traders and banks in Dubai and elsewhere. The origin of the refined output nevertheless clings to the trade data.

Neither New Delhi nor the U.S. State Department, which have bumped along in relations complicated by India’s own nuclear development, seems much alarmed. India’s Ministry of Foreign Affairs spokesman says all international strictures are observed and nothing sinister is at hand. Washington wouldn’t comment without verifying the data.”

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