The Red Sea Attacks: A Threat to the Global Economy?

On 20th November 2023, a cargo ship- Galaxy Leader, was seized in the Red Sea by Houthi militants' helicopter. This was followed by a wave of attacks on various cargo ships travelling from the Red Sea route by the Houthi militants in Yemen which has raised concerns about the global supply chain as the region is a key route for the global economy. About 12% of the global trade passes through the Red Sea amounting to $1 trillion annually. The major goods that pass through the Red Sea comprise- Liquefied Natural Gas, oil and consumer goods. One of the most important commodities to pass through the Red Sea, which offers a route to the Suez Canal, is oil with the majority of oil traded through sea passing through this route. The shipping of these commodities has come under attack from the Houthi rebels in Yemen attacking cargo ships in the Bab-Al-Mandib strait in the Gulf of Aden, which is a critical choke point to the sea trade, Instead of taking the Red Sea route, the ships are now forced to take the Cape of Good Hope route through the southern tip of Africa, which adds to the rise in shipping costs and delays of about 10 days in shipping goods. This adds to the rise in cost for firms which is later passed on to the consumers, which could mean more inflation and threaten the global economy.

Why is the Bab-Al-Mandib strait so significant?

The Bab-Al-Mandib strait is a critical choke point to the Red Sea which then connects to the Suez Canal, a key route for global trade. Around 12% of the global trade passes through this strait and then to the Red Sea, making it significant. It is a narrow strait of only 20 miles wide and any tensions or instability in this region could act as a bad omen for the global supply chain and overall the economy. A disruption in this region could delay the delivery of goods worldwide, which could falter the economies worldwide.

Why are the Houthis attacking Ships?

Following the Hamas attack on Israel on October 7, the Houthis, a militant group in Yemen backed by Iran (an arch-rival of Israel), declared war on Israel and vowed to target all maritime shipments linked to Israel. Since then, the Houthis have targeted cargo ships in the Red Sea using drones and ballistic missiles and have also hijacked some ships which has instilled a fear in the global shipping firms which are now avoiding the Red Sea route. Those ships that are not linked to Israel have also been targeted in such attacks.

Are these attacks a worry for the global economy?

In response to these attacks on random cargo ships, many shipping companies have suspended operations in the Red Sea and have shifted to the alternative route of 'the Cape of Good Hope'. The famous shipping giant Maersk has shifted its trade roots from the region to the alternative route via Africa. Oil giants like the British oil company BP have also suspended their regional operations.

Suspending operations in the Red Sea is a major setback to global shipping firms as it is the most common route for sea trade between Asia and Europe. Abandoning this route and taking alternative routes through Africa will add to a rise in costs for shipping firms in the form of extra fuel costs and a rise in delay of orders. Insurance premiums for shipping companies have risen to 0.7% of the value of the ship up from just 0.07% of the value of the ship in December. This has added to rising transportation costs for shipping firms. Companies like Ikea have warned that the Red Sea attacks could delay orders and restrict the availability of some of its products.

What does it mean for the oil market?

Soon after the attacks on ships started in the Red Sea, there was a renewed fear of a rise in oil prices. On 20th December, Brent crude oil prices rose by 3% to $79 a barrel. There has been a rise in demand for oil in Asian countries like China and India from the Middle East, however, these demands may be impacted as shipping firms abandon the Red Sea route. Though oil tankers have yet not been attacked in the region the risk of a wider conflict seems imminent as tensions escalate day by day. A larger conflict in the Middle East will thus definitely involve higher crude oil prices which will lead to sluggish economic growth.

Analysis

The Israel-Gaza war has once again escalated tension in an already volatile region of the Middle East. The Houthi attacks in the Red Sea have posed a great challenge to the global economy which has been suffering setbacks one after another. First came the global challenge of COVID-19 and its disruption of global supply chains severely impacting the global economy followed by the Russia-Ukraine war which led to fluctuations in oil and natural gas prices impacting economies in Europe. The attacks in the Red Sea could thus now lead to a devastating impact on the global supply chains and fuel inflation in many regions as the route remains threatened by deadly Houthi attacks. As hundreds of shipping firms have diverted their route to Africa in a bid to avoid the Houthi rebels it seems that consumers around the world especially in European economies could face higher inflation in costs of retail items and delays in orders, Shipping in the Red Sea has been down by 28% as compared to last year and trade has picked up in the Cape of Good Hope by 67%. However, this rise in trade through Africa will not be beneficial for the global economy and is rather devastating. Consumers in Europe and the East Coast of the United States might have to pay more for their goods as the firms are likely to add the rise in shipping cost to the cost of the products they are selling. Higher inflation would mean lower spending by consumers in different countries which would negatively impact the economies. Economies in Europe like the United Kingdom have anyways had a rough year with the inflation numbers rising to 3.9% in November last year. A turbulence in trade through the Red Sea could make matters even worse as the economy may face higher inflation numbers this year affecting its economic growth.

Conclusion

Though the United States of America has announced a naval task force for safeguarding routes in the Red Sea for shipping firms, the confidence in shipping firms remains low regarding this task force as it has not been able to back off the Houthis attacking the ships and their attacks have been increasing day by day. We need a more comprehensive approach to tackle this issue and safeguard our shipping routes.

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References

 Peri, Dinakar. “Houthi Attacks: A Threat to Global Shipping?” The Hindu, December 28, 2023. https://www.thehindu.com/news/international/houthi-attacks-a-threat-to-global-shipping/article67683206.ece.

 Butler, Sarah. “Ikea Warns Red Sea Attacks Could Disrupt Supplies and Deliveries.” The Guardian, December 21, 2023. https://www.theguardian.com/business/2023/dec/21/ikea-warns-red-sea-attacks-could-disrupt-supplies-and-deliveries?CMP=Share_iOSApp_Other.

 Yerushalmy, Jonathan. “Red Sea Crisis Explained: What Is Happening and What Does It Mean for Global Trade?” The Guardian, December 19, 2023. https://www.theguardian.com/business/2023/dec/19/red-sea-shipping-crisis-bp-oil-explained-what-is-happening-and-what-does-it-mean-for-global-trade.

 Jolly, Jasper. “More than 100 Container Ships Rerouted from Suez Canal to Avoid Houthi Attacks.” The Guardian, December 20, 2023. https://www.theguardian.com/business/2023/dec/20/more-than-100-container-ships-rerouted-suez-canal-red-sea-houthi-attacks-yemen?CMP=Share_iOSApp_Other.

 Fernandes, Jocelyn. “Mint Explainer: The Red Sea’s Importance and Its Economic Impact.” Mint, December 20, 2023. https://www.livemint.com/economy/mint-explainer-the-red-seas-importance-and-its-economic-impact-11703062868545.html.

 Berman, Noah. “How Houthi Attacks in the Red Sea Threaten Global Shipping.” Council on Foreign Relations, January 5, 2024. https://www.cfr.org/in-brief/how-houthi-attacks-red-sea-threaten-global-shipping.

  Schuler, Mike. “Galaxy Leader Owner Calls for Release of Crew After Video Surfaces.” gCaptain, November 24, 2023. https://gcaptain.com/galaxy-leader-owner-calls-for-release-of-crew-after-video-surfaces/.