Tankers, Terror, and Tariffs: How Houthi Attacks are Squeezing the Global Economy

Houthi attacks on ships in the Red Sea

The rate of attacks on commercial ships in the Red Sea by the Houthi rebels in Yemen is increasing in proportion to the Israel firepower directed at Hamas in the Gaza Strip - to a crisis level.

Judging by the warships that congregate in the region and the critical discussions that take place in the corridors of power in the West and their regional allies, the situation has clearly evolved into a military conflict on a second front, as far as the war in the Gaza Strip is concerned.

The recent spate of Houthi attacks that started on Israeli-linked ships at first, has since been extended on other commercial ships as well in the Red Sea; the development has sent shockwaves through the global shipping industry and raised concerns about a potential spike in oil prices.

This strategic waterway, responsible for roughly 10% of the world's seaborne oil trade and 12% of global trade overall, has become a precarious route due to the escalating conflict by the Houthi rebels in Yemen.

The shipping disruption is serious: Major shipping lines like Maersk and Hapag-Lloyd have rerouted vessels around the Cape of Good Hope, adding thousands of miles and days to journey times. A detour of this kind translates to increased fuel costs, delays in deliveries, and higher shipping fees for consumers, when companies feel being squeezed on their margins at a challenging time for the global economy as a whole.

Costly detour bypassing the Red Sea

It is not a silver bullet, though. The effect of weather patterns and seasonal oceanic currents, meanwhile, can further hamper the movement of the ships along the alternative route. 

A ship that sails from Europe to Sri Lanka, for instance,  that usually takes 18-25 days, depending on the size and the speed of the ship, could potentially take up to 35 to 45 days, if it bypasses the Suez Canal, choosing a detour due to the prevailing risks.

In certain situations, however, the choice of the alternative route has added benefits: the tolls across the Suez Canal can be very high and the relatively-narrow waterway is not for every single ship. The congestion and inevitable delays that arise from it, are known major issues as well.

Ports along the alternative route around Africa, on the other hand,  are experiencing increased traffic, leading to congestion and potential delays in cargo handling, as the countries in region are not usually prepared to handle an emergency of this nature. 

The delays - and of course, increasing costs -  further disrupts supply chains and adds to the financial burden on shippers that will ultimately pass it on to beleaguered consumers across the globe.

Shipping companies, meanwhile, are dreading a spike in premium on risk on the insurance front. If the crisis continues without a solution in the offing, the increased insurance costs will factor into crude oil and LNG, liquified natural gas prices soon.

With just five days to go before the Christmas, detours by some supply ships may result in delays before reaching the intended ports. China, a leading supplier of global products, perhaps sensing the calamity two months ago, had already deployed its warships in the region to safeguard its commercial interests. 

In order to counter the threats, the US has already deployed a few of its aircraft carriers and destroyers in the region; they have been active in shooting down drones and missiles launched by the Houthis since October.  Britain already had deployed its own warships in the region too. 

The US, meanwhile, has been instrumental in forming an international task force, Operation Prosperity Guardian,  to deter the attacks by the Houthis on commercial ships and ensure safe passage for the ships. 

The coalition include the US, Britain, France, Spain, Bahrain, Canada, Italy, the Netherlands, Norway and Seychelles. Some countries have already placed their military assets in the region and the palpable urgency have placed them under one umbrella for a collective response, in the event of the Houthis escalating the threats. 

The participation of the UAE and Saudi Arabia, the two significant military powers in the Middle East, however, is far from clear yet; both had been under constant attacks by the Houthis up until a year ago -  until a fragile peace process was agreed upon. Perhaps both countries do not want to derail the peace process with the Houthis that had been dragging for years along the Sunni-Shia divide.

The key players in the Middle East may be weary of the evolving stance of the US over the Houthis: the Biden Administration removed it from the designated terrorist list as one of its major policies at the outset, after taking over the White House; then the US removed its Patriotic missile batteries from Saudi Arabia - its only defense against the threat of explosive-laden drones from the Houthis for inexplicable reasons, forcing the old ally to borrow them from Greece; As the war in the Gaza Strip broke out, the Houthis threatened both Israel and its ally, the US, that resulted in the former being designated as a terrorist group - again.

A few days ago, when British Petroleum, BP, declared that they would divert its ships along a longer route while bypassing the Red Sea citing the drone threats, the British government was compelled to act. Not only did it deploy HMS Diamond, a Type 45 destroyer of the Royal Navy, to the region, but also shot down a Houthi aerial asset, most probably a drone aimed at a ship. 

Firing an expensive missiles that costs around $2 million a piece to take down a drone that just costs around a few thousand dollars, however, leads to the concerns about the  inevitable economic viability of such operations; judging by the officials concerns expressed in private,  they clearly hints this aspect of the Operation Prosperity Guardian, despite the encouragingly-soothing connotations of the code name chosen for the task. 

The tension in the Gulf of Aden in particular and in the Middle East in general, is taking its toll on the price of commodities. The price of crude oil and LNG, liquified natural gas, which had been in decline for weeks, have shot up again, that in turn may affect the inflation once again, just as it shows signs of easing. 

Oil and gas prices

In the UK for instance, the fall in inflation, clearly attributed to the falling oil prices, may go into reverse mode once again, if the latter rise.   

In this context, the efforts to finding a diplomatic solution to the Gaza conflict are clearly underway. Israel's willingness to agree to a second pause in fighting may be a first step in this direction, although the Jewish state and Hamas are still at loggerheads over a range of major issues.

All the parties involved, directly or not, meanwhile, know the need of bringing back normalcy to the global trade and flow of oil across the vital artery for both. 

In this context, the stakes cannot be higher for the West, Iran and its proxies in the region, unless they find common ground to easing the tension.