The intensified attacks on commercial and merchant ships in the Red Sea by Iran-backed Shiite Houthi rebels could drastically surge prices of oil, and insurance premiums for ships and other goods, creating a domino effect for inflation, as warned by experts. Following these attacks, several major oil and shipping firms have announced to either suspend or re-route the trade away from the Red Sea creating a major disruption in the maritime trade. It is important to note that this disruption poses a higher risk than the one recently faced during the 2021 Suez Canal blockade crisis.
Unlike the Suez Canal blockade which was a result of an oversized container ship named ‘Ever Given’ running aground by a “gust of wind”, the attacks by Houthis have put the safety of the entire shipping route in the Red Sea in jeopardy. Resultantly, considering the strategic importance of the unhindered and safe trading route through the Red Sea, the US today (19th December) announced a 10-nation naval force to combat Houthi rebels threatening maritime trade in the region. Additionally, India has also reportedly stationed two destroyers off the coast of Aden for maritime security, however, the government has not officially confirmed the development.
The strategic significance of the Red Sea
The Red Sea serves as a crucial route for global trade, facilitating the transportation of essential cargoes like oil, liquefied natural gas, and consumer goods. This route is bordered by the Bab al-Mandab Strait, also known as the Gate of Tears, in the south near the Yemeni coast and the Suez Canal in the north.
This strategic maritime route supports around 12% of global trade, including 30% of the world’s container traffic. Each year, billions of dollars worth of traded goods and supplies traverse the Red Sea, making it a linchpin for international commerce. Disruptions and delays in this region can result in widespread consequences worldwide including driving global inflation.
Moreover, to circumvent the risk of Houthi attacks, vessels would have to opt for an alternative route around the Cape of Good Hope, which adds approximately 3,500 nautical miles to the journey and extends the duration by about 10 days.
Speaking with BBC, Marco Forgiona, from the Institute of Export and International Trade stressed that rerouting would increase fuel and insurance costs for shipping. Forgiona added, “Then you’ve got the issue that the ships are in the wrong place, the containers are in the wrong place and you get the potential for congestion at the ports and further delays”.
As per the BBC report, currently changes to the oil price have been minimal. The report added that on Monday the prices surged by 1% however on Tuesday they were little changed with benchmark Brent crude trading at around $78 a barrel.
The immediate consequence has already started to reflect in the form of a surge in the insurance costs for vessels transiting through the Suez Canal and the Red Sea. Typically, shipping companies must inform their insurers when navigating high-risk zones and pay an additional premium. The risk premium, which was merely 0.07% of a ship’s value at the beginning of December, has recently escalated to approximately 0.5%-0.7%.
On Monday (18th December), a consortium of leading marine insurers expanded the designated high-risk area in the Red Sea, necessitating more vessels to pay the premium. This increase in shipping insurance costs has led to a weekly rise of tens of thousands of dollars in the expenses of shipping goods through the Red Sea. However, many traders found the risk too significant and opted to re-route away from the Red Sea.
The ongoing Red Sea crisis and US-led Naval force counter operations explained in detail
The current Red Sea crisis started when Houthi rebels extended their support to the Palestinian Islamist terror group, Hamas in its ongoing war against Israel. For several months, the Houthis, based in South Yemen near the strategic choke point of Bab el-Mandab in the Red Sea, have been directing attacks on commercial and merchant ships. This is a deliberate strategy aimed at exerting pressure on the international community, blackmailing them to intervene and halt Israel’s military operations in Gaza to ensure the safety of trade routes in the Red Sea.
While the terror outfit has claimed that they were targeting vessels that they believe are heading for Israel, several firms attacked by the Houthis have asserted that they were attacked despite having any links with Israel. One such firm named Investor Chemical Tankers’s Swan Atlantic vessel was attacked on Monday (18th December). The firm said that its ship had no links to Israel.
Investor Chemical Tankers said that its Swan Atlantic tanker was hit by an “unidentified object”. Earlier on Friday, Maersk, the world’s second-largest shipping line, described the situation as “alarming” following a “near-miss” incident involving Maersk Gibraltar and another attack on a container ship.
Similarly, a German firm, Hapag-Lloyd’s vessel named Al Jasrah was also attacked last Friday (15th December).
Speaking with BBC, a naval historian at Campbell University, Sal Mercogliano said, “The ballistic missiles are really the tough one. This is the first time we’ve ever seen ships hit by this type of weapon. It’s a very difficult type of missile to shoot down. And if that’s the threat that the ships are facing, many shipping companies may decide not to go that way.”
Consequently, on Tuesday (19th December), the world’s second-largest shipping line, Maersk announced that it would reroute some of its vessels around Africa’s Cape of Good Hope. A day earlier on Monday, Oil giant BP had announced that it would temporarily pause all shipments of crude through the Red Sea trade route. Meanwhile, as per media reports, BP’s rival energy giant Shell has not issued any comment so far.
As per reports, in the past week, major shipping companies such as Maersk, Hapag Lloyd, and MSC have opted not to use the Red Sea. According to the Atlantic Council think tank, seven out of the ten largest shipping companies by market share have suspended shipping activities in the Red Sea.
The crisis in the region gets further complicated by the involvement of Islamist Somali pirates, who are seizing merchant tankers in exchange for substantial ransom payments. Currently, the Malta-flagged tanker MV Ruen is under the control of Somali pirates and has been relocated to Mogadishu.
In the wake of the crisis unfolding in the Red Sea, the US-led alliance and India have increased their vigil and presence of maritime forces in the region to ensure the safety of strategic maritime trade. Incidentally, on Tuesday (19th December), US Defence Secretary Lloyd Austin held a virtual meeting with ministers from more than 40 countries. During the meeting, he called on more nations to contribute to the security efforts.
He said, “These reckless Houthi attacks are a serious international problem and they demand a firm international response.”
Further, the US launched an international naval operation named Operation Prosperity Guardian. The operation to protect merchant and commercial ships in the Red Sea route includes the navies of ten countries – Bahrain, Canada, France, Italy, Netherlands, Norway, Seychelles, Spain, the UK, and the US.
According to reports from Indian media, India has deployed two guided missile destroyers off the coast of Aden as part of maritime security operations in the northern Arabian Sea. The reports state that the Indian Navy destroyer INS Kochi is actively engaged in safeguarding merchant vessels against potential threats from Somalian pirates at the mouth of the Red Sea.
Additionally, India has dispatched another guided-missile stealth destroyer, INS Kolkata, to bolster maritime security along the coast of Aden.
Despite the US announcement of the international operation aimed at securing safe passage through the Red Sea, Maersk indicated that the timeline for resuming trade along the route remains uncertain.
Maersk said, “A case-by-case assessment will take place to determine whether adjustments need to be made – including diversions via the Cape of Good Hope and further contingency measures”.
Meanwhile, German firm Hapag-Lloyd whose Al Jasrah vessel was attacked last Friday by Houthis, welcomed the new task force. However, the company added that they need 100% assurance that the Red Sea was safe for ships to return.
Hapag-Lloyd’s head of corporate communications, Nils Haupt said, “This industry is keeping world trade alive and attacks on merchant shipping are unacceptable.”
