Economic Risks of the Ongoing Crisis in the Red Sea

The series of attacks on commercial shipping vessels passing through the Bab-el-Mandeb strait by Houthi rebels (a detailed article about them) in Yemen has escalated into a crisis in the Red Sea with dire economic consequences if left unresolved. The narrow waterway connecting the Red Sea and the Gulf of Aden is one of the world’s most crucial oil trade routes, with around 12% of global trade and 30% of global container traffic traversing it daily. 


However, the attacks which began in late November 2023 have already disrupted global supply chains and trade flows with cascading effects that threaten to spill over into a global economic crisis.


While the Houthis initially launched the attacks in response to Israeli airstrikes on Gaza, their targeting of commercial ships from all countries indicates the conflict has taken on a broader geopolitical dimension. Over a dozen vessels from countries like Germany, Greece, India, Japan, and Saudi Arabia have come under attack using drones, anti-ship missiles, and fast boats. This poses a grave threat to the international order and could set a dangerous precedent if left unchallenged. The disruption caused has no regard for borders, impacting people across continents.



Economic Implications of the Crisis in the Red Sea


The immediate impact of the attacks is being felt through rising shipping and insurance costs and delays in the delivery of vital goods. Major shipping companies have been forced to suspend or reroute services away from the Red Sea and around the southern tip of Africa, adding up to 10 days and 6,000 km to journeys. This increases fuel consumption and freight rates, with the costs ultimately being passed on to consumers worldwide in the form of higher prices. Estimates suggest global trade is already facing additional costs of over $4 billion due to the crisis in the Red Sea.



Rise in Shipping Costs | Source: Guardian


Shipping and insurance rates have risen 15-20% on average for vessels transiting alternative routes according to major brokers like Lloyd’s of London. This has raised costs for exporters. The longer journeys have also increased waiting times at ports by 5-7 days, exacerbating existing port congestion and delays caused by labor shortages and infrastructure constraints. 


Major global retailers warn inventory levels may be impacted due to late or stalled deliveries, potentially leading to shortages and price increases of goods as diverse as toys, clothes, and electronics heading into the holiday season. Car manufacturers have also warned production may be disrupted if microchip and component deliveries from Asia are delayed, raising the cost of living further.



Also Read: Economic Growth, Wages, and Incomes in the High-Price Era



Crucially, the attacks endanger energy security as the Bab-el-Mandeb strait is a major chokepoint for oil shipments from the Gulf to Europe and Asia. Over 5 million barrels of crude and refined petroleum products pass through it daily. Even the threat of attacks has caused oil tankers to be diverted, disrupting supply. This has contributed to volatility in oil prices, with Brent crude rising over 10% since the crisis in the Red Sea began. Sustained disruption could cause diesel and jet fuel shortages, severely impacting industries and travel.


Oil refineries in Europe and Asia have had to rely more on expensive tanker deliveries from the Americas to offset Middle East supplies diverted from the Cape route, raising production costs. Airlines have seen jet fuel costs rise 20-30% with disruptions to Gulf supplies, threatening further ticket price increases and potential flight cuts if the crisis persists. Power outages have occurred in some regions due to delayed diesel shipments, highlighting the fragility of energy supply chains. Prolonged blockades may cause short-term fuel rationing.


The humanitarian toll is also immense. Over 80% of Yemen’s food and fuel imports come through the Bab-el-Mandeb strait. Any blockade raises the risk of millions more people plunging into famine and disease after years of war. It threatens to undo aid efforts and worsen what the UN calls the world’s worst humanitarian crisis. Regional stability is also at stake, with the attacks undermining peace efforts and risking an escalating military conflict between the Houthis and the Saudi-led coalition.


While the US-led maritime coalition has succeeded in repelling some attacks so far, a long-term solution requires a diplomatic resolution to the underlying conflict. The international community must apply coordinated political and economic pressure on all sides to commit to an immediate ceasefire and return to UN-led negotiations. Otherwise, the economic fallout of a full-scale blockade will be difficult to contain. Supply chain disruptions could cause shortages and factory shutdowns, undermining consumer spending and business investment globally for months.



A Solution Must be Found


The ongoing crisis in the Red Sea poses grave risks to the global economy that could trigger a recession if left unchecked. Urgent and sustained multilateral action is needed to secure the vital Bab-el-Mandeb trade route before the attacks spawn an economic crisis with consequences felt for years to come in all corners of the world. 


Diplomacy and humanitarian efforts must take precedence over military escalation in resolving this crisis.


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