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May 27, 2024

Global supply chains threatened as attacks escalate in Red Sea

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Jan 30, 2024

A series of escalating attacks on commercial ships transiting the Red Sea has severely disrupted global trade routes and raised concerns over potential economic fallout. Over the past two months, Yemen’s Houthi rebels have targeted dozens of oil tankers and cargo vessels near the Bab el-Mandeb strait, a critical chokepoint connecting the Red Sea with the Gulf of Aden and Arabian Sea.

Attacks causing shipping diversion, freight cost spikes

According to the UN Conference on Trade and Development (UNCTAD), the attacks have forced many ships to divert around the southern tip of Africa, leading freight rates on some routes to triple or quadruple and transit times to double.

“We are witnessing unprecedented disruptions to global trade. The repercussions of the crisis in the Red Sea, if not resolved quickly, will be felt across economies near and far,” UNCTAD Secretary-General Rebeca Grynspan said in a statement last week.

The Suez Canal Authority reported a 42% year-over-year decline in transits over the past two months as ship operators opt for the longer Cape of Good Hope route to skirt the conflict zone.

Economic impacts mounting

So far the crisis has had limited impact on inflation or consumer prices in major Western economies. However, higher shipping costs are being felt acutely by countries like India and Malaysia which rely heavily on Red Sea trade corridors.

Goldman Sachs warned that prolonged disruption around the Red Sea could shave 0.2 to 0.5 percentage points off U.S. GDP growth in 2024. Meanwhile, global air cargo volumes were up 11% year-over-year in December, indicating high demand for air freight amid maritime uncertainties.

Attacks threaten critical oil flows

The Red Sea is a vital artery for global energy markets, with approximately 10% of world crude oil supplies flowing through the Bab el-Mandeb each day. The attacks have mostly targeted container vessels so far, but any hit on an oil tanker could have catastrophic environmental and economic consequences.

Brent crude prices briefly surpassed $90 per barrel last week on fears of supply constraints before retreating again to around $86. The International Energy Agency is keeping a close eye on the situation but says global markets remain well supplied thanks to high inventories and spare OPEC production capacity.

Pressure builds on international community

The United States and allied navies have stepped up escorts through the Red Sea in recent weeks. However, with over 55 attacks reported since November, protection remains limited and shipping companies continue diversifying routes where possible.

Growth in nautical miles traveled

Year Nautical miles (billions) % change
2022 70.2 +5.2%
2023 81.3 +15.8%
2024* 98.5 +21.1%

*Projected, assumes crisis continues

Source: Clarksons Research

Many observers argue that ending Yemen’s long-running civil war is the only way to resolve tensions over the Red Sea. But with peace talks going nowhere, the Biden administration is under pressure to take more forceful action as economic costs mount. African nations have also called for greater involvement in mediating the conflict.

What’s next?

Most experts believe the crisis will drag on for months absent a peace breakthrough in Yemen. While the odds of a total blockade of the Red Sea remain relatively low, persistent harassment of commercial shipping seems inevitable.

To mitigate risks, more shipping lines will re-route around Africa and pass on higher insurance and fuel costs to customers. However, the shipping industry says rates have peaked and expectations are for more stable conditions by mid-year as attackers and defenders settle into an uneasy operational rhythm.

Potential flare-ups around Yemen’s expired ceasefire in April could quickly dash such hopes. But for now, global supply chains remain resilient enough to handle the pressures resulting from the Red Sea attacks. The economic impacts should remain localized unless the crisis dangerously escalates or endures beyond 2024.

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AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.

By AiBot

AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

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