Global supply chains are once again under threat, as the impact of the ongoing war between Israel and Hamas ripples out across the Middle East.
In recent weeks, Houthi militants based in Yemen have stepped up their attacks on commercial shipping vessels travelling through the Red Sea and the Suez Canal, in response to Israel’s ongoing bombardment of Gaza.
Tankers and cargo ships have been targeted by drone and missile attacks launched from Yemen – and although the damage caused has been minimal in most cases, the threat alone has left trade routes through the Red Sea at a near standstill.
Why is the Red Sea so significant?
Everything from the cost of petrol at the pump to the availability of the latest electronic device is heavily dependent on the security of a narrow strait of water – just 20 miles wide – between Djibouti and Yemen: the Bab-el-Mandeb strait. It’s vessels in this waterway that the Houthis have been firing at.
The Bab-el-Mandeb strait – part of the most densely packed shipping channel in the world – marks the southern entrance to the Red Sea, which connects to the Suez Canal.
The canal revolutionised global trade when it opened more than 150-year ago, creating a shortcut between the US and Europe, and the Middle East and Asia. About 12% of global trade passes through the Red Sea, including 30% of global container traffic. Billions of dollars of traded goods and supplies pass through the Red Sea every year, meaning that delays there can lead to significant disruptions the world over.
What are the Houthis doing?
Analysts have expressed alarm at how easily the Iranian backed group has been able to disrupt the most significant trade route on the planet. From their base in Yemen’s capital of Sana’a, the Houthis have targeted ships in the Bab-el-Mandeb strait as they enter the Red Sea on their journey to the Suez Canal.
Despite initially saying that only ships travelling to Israel were being targeted, the threat to trade has grown as vessels flagged to other countries with no connection to Israel have been attacked as well.
In response, French, British and US navy ships have shot down some of their drones and missiles and on Monday the US announced it had assembled a coalition of countries who have agreed to carry out patrols in the southern Red Sea to try to safeguard vessels against attacks.
Mohammed al-Bukhaiti, a member of the Houthi leadership, has told Al Jazeera his group will confront any coalition formed by the United States that could deploy to the Red Sea.
How will the disruption effect shipping?
The most immediate effect has been a rise in the cost of insuring vessels that travel through the Suez Canal and Red Sea.
Typically, ships must notify their insurers when sailing through high risk areas and pay an additional premium. This risk premium paid by shipping companies was just 0.07% of the value of a ship at the start of December, but has risen to about 0.5%-0.7% in recent days.
On Monday, a group of prominent marine insurers also widened the area in the Red Sea they deem to be high risk, meaning more vessels will have to pay the premium.
As a result of the cost of shipping goods through the Red Sea has risen by tens of thousands of dollars a week.
For most traders however, the risk is too great.
In the last week prominent shipping companies including Maersk, Hapag Lloyd, and MSC have decided not to use the Red Sea. According to thinktank the Atlantic Council, seven of the ten biggest shipping companies by market share have suspended shipping in the Red Sea.
Some ships are being diverted around the Cape of Good Hope, on the southern tip of Africa, adding up to two weeks in journey time.
On Monday, BP joined in on the act, halting all shipments of oil and gas through the Red Sea.
What will the effect on consumers be?
Oil and natural gas prices rose on the news that BP was pausing shipments through the Red Sea. Analysts say that if the attacks on vessels continue and more oil companies halt shipments through the Red Sea, energy costs are likely to rise further.
Meanwhile, shipping companies have a binary choice: face the risk of travelling through the Red Sea and the increased insurance costs that brings with it – or divert their vessels though other routes.
Either option will see higher freight rates and delays in the delivery of cargo – the costs of which will run up and down the entire supply chain.
The Atlantic Council has said the disruption could create a “strong headwind to the global economy which is still recovering from … the Covid-19 pandemic, Russia’s invasion of Ukraine, and the significant monetary tightening,” seen in many countries.
With central bankers the world over on the cusp of declaring victory in the fight against inflation, a rise in oil and gas – coupled with disruption to the global supply chain – could threaten to upend those successes.
