Red Sea crisis could affect trade and prices

The combat reports from Western navies operating in the Red Sea in recent days read like missives from a war zone — anti-ship missiles shot down, boats full of fighters sunk. But this conflict is playing out in one of the world’s busiest waterways and the knock-on disruption to global trade routes has the potential to reverberate around the globe.

Attacks on commercial shipping by Yemen’s Houthi militants have spiked in recent weeks in the wake of the Israel-Hamas war, with dozens of cargo ships and fuel tankers targeted or delayed as a result of the fighting.

While a U.S.-led coalition has been deployed to keep peace in the region, the impact of the burgeoning conflict is already being felt in a number of sectors. And, with Iran vowing to ensure its long-running efforts to pressure Israel continue, it’s likely the crisis has only just begun.

Here’s what it means in practice.

Bad for business

The Bab el-Mandeb strait, located between Djibouti and Yemen, has been the focal point for Houthi attacks on vessels. The narrow crossing marks the southern entrance to the Red Sea — a crucial waterway between Europe and Asia connecting to the Suez Canal. An estimated 12 to 15 percent of global trade takes the route, representing a sizeable share of all container traffic. The attacks have caused operators to delay shipments or divert ships around Africa’s Cape of Good Hope — adding up to two weeks to delivery times and creating additional cost.

That’s expected to drive up prices for consumers in the coming weeks. “There’s been an immediate volatility in oil price and prices of some of the other commodities that transit through but it takes a while for this to feed through to what prices consumers pay,” said Marco Forgione, director general at the Institute of Export & International Trade. Products ranging from Scottish whiskey to clothing from India, Vietnam, Thailand and Bangladesh all transit through the Suez canal, he said.

The current impact isn’t comparable to the days-long blockage of the canal in 2021 by the Ever Given container ship, given some ships still navigate through the waterway, according to experts. But the situation is also much more volatile, warned Forgione, arguing that the Houthi attacks are a “much more nuanced and difficult issue to resolve” than the Ever Given blockage. At the same time, global trade has already been restricted by a drought in the Panama Canal.

Should Iran, which supports the Houthis and has deployed a warship to the region, want to continue to up the ante, it could exert pressure on the Strait of Hormuz off its own coast, another key transit route, escalating supply chain disruptions further. “Iran suddenly has the ability to shut down or at the very least disrupt the two most important shipping lanes for Europe,” said Tobias Borck, senior research fellow for Middle East security at the Royal United Services Institute, a U.K.-based think tank.

Winter worries

The Red Sea is also a vital thoroughfare for the flow of energy — tankers carrying between 8 to 10 percent of the world’s oil and up to 8 percent of its liquefied natural gas transit the straits each year. Energy giant BP is among those that have been forced to avoid the waterway, instead going the long way around Africa’s Cape of Good Hope.

According to analysts, that’s driving up shipping costs, and the increased risks could see insurance premiums raised. Gas futures rose 7 percent in December as carriers diverted their fleets and traders expected higher prices for January, while the going rate for Brent crude jumped 2 percent on the news of further clashes earlier this week.

There’s also concern that Iran’s role in fomenting conflict in the region could lead to Western nations cracking down again on the country’s energy exports. According to Simone Tagliapietra from Brussels’ Bruegel think tank, there has been a “really deliberate effort” in recent months to relax restrictions on the sale of Iranian oil — much of which goes to China and has helped bring down prices on the global market. A renewed standoff could see tougher enforcement against Tehran, compounding supply fears.

However, the direct economic impact of the disruption in the Red Sea is being offset by significant disinflationary forces at work in the European economy. Higher interest rates are already pushing down demand, not least for goods imported from Asia. Across Europe, taxes are being raised to close excessive budget deficits, squeezing that demand still further. Higher oil prices are likely to lead to lower consumption — and increase the likelihood of a recession later this year.

Cash for the clash

Since the crisis in the Red Sea started, military vessels from the U.S., the U.K. and France have repeatedly had to open fire against Houthi missiles and drones, with Washington leading a coalition to ensure maritime security.

The standoff between Houthis and Western navies reflects a new type of warfare that is not sustainable in the long run, with sailors having to deploy ultra-expensive missiles to knock out cheap drones. “The cost offset is not on our side,” one official from the U.S. Department of Defense said last month.

For example, the French Languedoc frigate last month used €1 million Aster 15 surface-to-air missiles to shoot down Iran-made Shahed-type drones, likely used by the Houthis, that cost about €20,000 at most, creating a growing budgetary impact for those trying to keep the peace.

The Red Sea crisis shows that, with missiles and drones launched from the ground, hostile groups no longer need large fleets to have a military impact on the seas, according to Maxence Brischoux, an expert in maritime geopolitics.

On both sides of the Atlantic, there’s a growing awareness that the West’s armed forces will need to rethink their military procurement to face low-priced threats. They’ll need to operate in the future a wider range of weapons to include low-end, cheap air defense systems instead of only focusing on ultra-sophisticated, high-end equipment, experts say — but, for now, they’re being forced to fire off some of the most expensive weaponry in their arsenals.

Tags: war