By Maj Gen P K Mallick, VSM (Retd)
The Red Sea is home to one of the most important maritime trade routes in the world, and the Houthis attacks have had far-reaching consequences. The Houthis had initially said they were attacking Israeli and Israel-bound ships in a show of support for Hamas. However, the group’s attacks have targeted a wide variety of merchant tankers. At least 44 countries are connected to vessels attacked by the Houthis and the attacks have disrupted wider international trade.
While the Bab el-Mandeb lies on its southern tip, the Suez Canal sits on its northern edge as a pathway to the eastern Mediterranean. The 190-kilometer-long artificial waterway runs along the Isthmus of Suez, a small strip of land that connects the African and Asian continents. About 12 per cent of global trade passes through the Red Sea. It includes eight per cent of the global grain trade and 12 per cent of seaborne-traded oil. Approximately 14 per cent of global oil exports pass through the canal, while more than 30 per cent of global container traffic is conducted through the Red Sea. An estimated $1 trillion in goods pass through the strait annually.
Almost 90 per cent of the oil that flows through the Bab el-Mandeb comes from the Persian Gulf and is destined for Europe and Africa. The other 10 per cent is oil from the Horn of Africa.
Europe stands to lose the most from higher energy prices because of the present disturbances. The Suez Canal route has become crucial since European countries stopped buying Russian oil. Most of these countries have replaced a great deal of the Russian petroleum they had been importing with crude oil and products from the Middle East. The fastest route to Europe from the Middle East is through the Red Sea and the Suez Canal, even though the Suez Canal is unable to accommodate some of the very largest crude oil ships, classified as Very Large Crude Carriers or VLCCs.
As it tries to shift away from Russian energy, it is relying more heavily on LNG. Most of the LNG flowing through the Bab el-Mandeb and the Suez Canal is headed for Europe. The good news for them is that Qatari LNG supplies to Europe continue to pass through the Red Sea and Suez Canal without any diversions. European underground gas storage facilities are now 97.89 per cent full and the winter so far has been mild.
Supply chains for other sectors have also experienced disruptions. Given that the Red Sea is used for transporting commodities and other resources between large markets, traffic disruptions here can have serious economic effects. This is especially the case at the moment because a severe drought has reduced traffic via the Panama Canal, causing U.S. grain shipments destined for Asia to take lengthy detours through the Suez Canal and southern Africa. The number of vessels passing through the Panama Canal daily has fallen by nearly 40 per cent, resulting in significantly longer wait times – and longer journeys, which directly influences freight costs and product pricing.
The Panama Canal Authority said on Dec. 15 that it would increase daily transit through the canal from 22 vessels to 24 in January due to increased rainfall and water levels. But even this figure is well below normal volumes. Rerouting through the southern tip of Africa is also costly.
Effect on Russia. The Red Sea is also a transit route for approximately 80 per cent of Russia’s petroleum destined for Asian markets and eight per cent of the global liquified natural gas trade. In the first 11 months of 2023, 42 per cent of Russian-loaded crude and products went through the Red Sea. However, none of the attacks in December 2023 targeted Russian shipments. Russia will benefit from the increased oil prices that will likely result from higher transport costs. The price of carrying oil through the Red Sea has increased. It is estimated that rerouting vessels destined for Europe from the Red Sea to the Cape of Good Hope could raise shipping costs by 80 per cent.
Effect on African Countries. For Egypt revenue from the Suez Canal is a major source of income. Egypt is already in the midst of a financial crisis which is suffering from a debt crisis made worse by trade disruptions with Israel due to the war in Gaza. The effects on the Egyptian economy are more severe as shipping through the Suez Canal contributes nearly $9.4 billion to the Egyptian economy. Israel will be far less affected as only about 5% of its trade passes through its Red Sea port Eilat. Israelis would face delays in the supply chain and price hikes. With ships spending as little time as possible in the Red Sea, countries such as Sudan and Eritrea, whose only ports are located on the Red Sea, will find it difficult to get ships to call at their ports. With less traffic through the canal, shipping to Mediterranean countries such as Greece, Italy, and Turkey will become especially cumbersome.
Effect on Global Trade. The Houthis attacks are already having an economic effect. Some ships are avoiding the faster route through Middle Eastern waterways by taking the longer and more costly route around Africa each adding around 6,000 nautical miles to the trip distance. Since late November, over 350 container ships plus all manner of tankers, bulk carriers, car carriers and other merchant vessels have diverted to other routes. BP and five major shipping companies, French CMA CGM, Danish Maersk, Hong Kong-based OOCL, German Hapag-Lloyd, and the Italian-Swiss-owned Mediterranean Shipping Company, the world’s largest shipping company, suspended their travel through the Red Sea.
The adverse effect on world shipping is huge. It includes immense logistical challenges that involve new charts and more fuel and getting crews and cargo to alternative staging posts. A new route around the Cape of Good Hope in South Africa and then up the western coast of Africa carries additional fuel costs and the costs of rerouting crews and cargo. This could add up to two weeks to shipping and add more than $1 million to the transportation costs. Insurance costs for commercial ships that go through the Red Sea have increased. Israeli ships have seen an increase of 250%, and others were unable to get any insurance. Journeys through the Red Sea bring hefty war risk premiums and the Cape of Good Hope route brings additional fuel costs and the costs of rerouting crews and cargo. Several shipping lines have already imposed surcharges for their services. Higher fuel prices, higher costs for shipping and higher insurance premiums would ultimately mean higher costs for consumers.
The delays and extra costs may be the first chapter in the geopolitically connected turbulence facing global shipping and the globalised economy.
Is the impact of Houthi attacks significant? While the current crisis caused by the Houthis is critical, it may not escalate into a full-fledged economic crisis. The events in the Red Sea could, however, lead to price hikes. Chris McMahon contends that the closing of chokepoints has no real impact on global trade, global shipping and the globalised economy as the shipping would transit through the alternate route.
After all Suez Canal has been closed several times. In 1956, the Suez Canal was shut down for six months after Egyptian forces sank several ships along the canal in retaliation for a British-French invasion of the recently nationalized canal zone. Britain and France experienced acute but short-lived disruptions to their oil supplies. The oil industry’s long-term response was to develop the VLCC to maximize the amount of oil that could be shipped around Africa.
The Suez Canal was closed for eight years between 1967 and 1975. As a result, the cost of shipping around the Cape of Good Hope was much higher than the Suez route but presented no serious economic hardship to global consumers. Rerouting the Red Sea trade would have some effect on the cost of global trade but it would not have a catastrophic consequence.
More recently, the Suez Canal was blocked for six days in March 2021, when the container ship Ever Given got stuck, causing losses of nearly ten billion dollars a day in international trade. There will be an increase in cost, but the market will adjust for the increased cost.
The shipping industry is extraordinarily efficient and resilient now than they were several years ago. It can circumvent serious problems. Disruptions from pandemic shutdowns and sanctions on Russia have prepared them to handle the logistics of rerouting or reloading ships to accommodate such disturbances in the least disruptive ways.
The point is should a rag-tag force like the Houthis be allowed to continue terrorising global commerce whereas maritime conventions protecting the safe passage of commercial vessels is one of the oldest and most universally recognized international law concepts? Freedom of navigation rights are also enshrined in the United Nations 1982 Law of the Sea Convention, which has been ratified by 169 parties.
In Part Four the Threat of Houthis will be analysed.
The author is an Indian Army Veteran
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