Tuesday, July 1, 2008

North Korea Long Crude Oil

Way back in February 2007, we reached a tentative deal on nuclear disarmament with North Korea during six-nation talks in Beijing. Under the agreement, North Korea promised to start dismantling its nuclear program. Remember what the other five countries promised to give North Korea in return? Oil. (Whoops.) Specifically, North Korea will receive roughly 1 million tons of fuel oil as it dismantles its nuclear program. They received 50,000 tons of oil immediately, and will receive the remaining 950,000 tons over time. Back when we reached the deal with North Korea (February 2007), crude oil was $59 per barrel. Now, crude oil is $142 per barrel. And North Korea just recently started to take the additional steps in dismantling its nuclear program that it has to take to receive the additional oil. 1 metric ton of oil is equal to 7.2 barrels, so 950,000 metric tons is equal to 6,840,000 barrels of oil. Assuming this is crude oil, if we bought all 6.8 million barrels of oil today (at $142 per barrel), it would cost us just under $1 billion. If oil prices continue to rise, we could be paying significantly more than $1 billion. Now, $1 billion may not be much to the U.S. (or any of the other countries involved in the talks), but it's about 2.5% of North Korea's entire GDP. In other words, North Korea turned out to be a savvy investor and negotiator. Well played.