The Impact of Red Sea Tensions on the Global Economy

The Red Sea in the Spotlight

Since the outbreak of conflict in Gaza, escalating events suggest a widening scope of the conflict to encompass broader regions in the Middle East. Daily military incidents along the Lebanese border, missile strikes, and drone attacks on U.S. military bases in Syria and Iraq have surpassed sixty.
The conflict has extended to Yemen, where the Houthies launched drone strikes targeting southern Israel and intercepted several ships heading to Israeli ports, threatening to continue unless a ceasefire is declared and the Gaza blockade is lifted.

The Bab el-Mandeb Strait witnessed around 20 drone attacks or ship interceptions from mid-November to mid-December. Consequently, major shipping companies, such as MSC and Maersk, halted their journeys through the Red Sea, diverting them via the Cape of Good Hope. Both MSC and Maersk collectively operate around 34% of the world’s container ship fleet, signaling a significant shift in one of the key international container shipping routes.

The Bab el-Mandeb Strait serves as the primary gateway to the southern Red Sea, facilitating 12% of global trade and 30% of global container trade.

The tension in the Bab el-Mandeb Strait echoes in the navigation volume through the Suez Canal, the northern entrance to Red Sea maritime trade. The Suez Canal Authority reported 55 ships diverting through the Cape of Good Hope from November 19 to December 17.

Although the Houthi threat specifically targets ships associated with Israel, comprising only 2.6% of vessels transiting the Suez Canal during that period, it remains a concern for many maritime shipping companies hesitant to navigate a perilous route.

This has led to a 100% increase in marine insurance costs, with insurance costs for ships bound for Israel rising by 250%. Some insurance companies even refuse coverage.
Shipping costs for certain vessels have also surged. The journey from Asia to Europe, which previously took 19 days, has extended to 31 days, resulting in delayed arrivals of goods and increased prices. This may lead to losses for many e-commerce companies as customers may cancel orders or bear the costs of delays.”

Impact on Oil Prices

Furthermore, the escalating tensions in the Red Sea may disrupt approximately 10% of global oil trade if the conflict intensifies in the Bab el-Mandeb Strait. While oil prices have not surged significantly, they experienced a 1.6% increase, reaching $79 per barrel for Brent crude.
The delayed arrival of oil shipments during their usual times may have a more direct impact on spot contracts than on futures oil contracts.

Considering the current global economic slowdown, the demand for oil is not expected to noticeably increase until the end of the next quarter. OPEC forecasts global oil demand growth of 2.2 million barrels per day, reaching 104.4 million barrels per day in 2024.

However, certain changes in the oil market may keep prices low for some time during the next four months. The United States is preparing to increase its oil production from the Permian Basin after announcing record levels of 13.3 million barrels per day during the third week of the current December.

Nevertheless, with the OPEC+ agreement to reduce production continuing until the end of the next quarter, any tension in oil trade routes will raise prices and increase the burden of inflation on countries.

The signs of this tension are becoming evident in the decisions of some companies, such as the giant oil company British Petroleum, which decided to halt all oil shipments across the Red Sea due to the “deteriorating security situation” in the region.

Additionally, the Norwegian company Equinor redirected its ships, implying that other oil companies may make similar decisions, leading to delays in fuel shipments exported to Europe and a potential increase in prices. This is particularly significant as approximately 22% of the refined oil exported to Europe passes through the Red Sea.”

Are Liquefied Natural Gas Supplies at Risk?

Bab el-Mandeb serves as a critical route for liquefied natural gas (LNG) shipments, facilitating half of the exported quantities, whether from Qatar to Europe or from Russia and the United States to their clients in Asia.

Consequently, natural gas prices spiked by 7.9% as several energy companies refrained from navigating the Red Sea, later receding to a 1.2% level amid cautious investor anticipation.
Although the war on Gaza affected Israel’s natural gas production, leading to the closure of the Tamar field platform and the utilization of most locally produced quantities, it did not disrupt global gas supplies or diminish the overall supply. Liquefied natural gas from the United States and Qatar constitutes a significant portion of the global market, mitigating concerns that might drive prices higher.

However, the sensitivity of the natural gas issue, particularly amidst the Russia-Ukraine war and European countries refraining from purchasing Russian gas, remains a worrisome concern. Despite the European Union’s gas reserves exceeding 90%, they need to ensure quantities covering the winter of 2025.

This may explain the deployment of the so-called Prosperity Guardian Alliance, which consists of military assets by the the United States, the United Kingdom, Canada, the Netherlands, Norway, Seychelles, Denmark, Greece, and Bahrain in the Red Sea, aimed at securing primary energy supplies and safeguarding global supply chains on the other hand.

Yet, liquefied natural gas supplies remain immune to potential disruptions, as global energy maps have adapted to this type of risk. LNG from the United States plays a crucial role in meeting the European market demand, while Asian countries source their LNG needs from Qatar, Australia, and other neighboring nations.

However, the price factor emerges as a dynamic element that could alter these patterns. A surge in demand in the Asian market may redirect quantities from the United States to Asia instead of Europe, necessitating the securing of these shipments, increasing their cost, and exacerbating the negative impact on the global economy’s performance.”

Exploring Alternative Routes

The prospect of closing Bab el-Mandeb appears challenging for the global economy, as approximately 15% of goods imported from Asia to Europe and North Africa via the Red Sea could be affected. Choosing the longer and riskier route around the Cape of Good Hope would delay Qatari gas supplies to Europe by approximately 22 days round trip.

Therefore, the search for shorter and less risky alternative trade routes becomes crucial to ensure the smooth and flexible flow of goods, sparing the global economy from further disasters.
In this context, Iraq emerges as a vital link between East and West. The planned development corridor, stretching from Basra on the Arabian Gulf southward to the Turkish border, offers a viable option. In addition to the trade route for transporting goods, the corridor includes energy pipelines that could make Iraq a crucial supplier of both oil and gas to European markets.
While Iraq’s oil exports to Europe through the Red Sea increased this year as an alternative to Russian oil, averaging 114,000 barrels per day compared to the same period last year, these quantities are expected to rise in the coming months.

Exports of oil from Kurdistan to Turkish ports remain suspended due to a Paris trade court decision, fining Turkey $1.5 billion for exporting Kurdish oil without Baghdad’s approval. However, heightened tensions in Bab el-Mandeb could accelerate an agreement between Baghdad and Erbil to pass legislation for oil and gas, allowing the resumption of exports through Turkish ports.

Similarly, for natural gas, Iraq is expected to export 28 million cubic meters per day by the end of 2027. It may be essential to seriously consider establishing a network of gas pipelines extending through the Kurdistan region to Europe, providing more flexible and less risky supplies.

In this context, the significance of the plans to create a Qatari-Turkish gas pipeline through Iraq at a cost of $20 billion, with a capacity of 31.5 billion cubic meters annually, stands out as one of the crucial options for delivering gas to the European Union.

With increased investments in Iraq’s gas fields, these quantities will grow, and Iraq will play a crucial role in exporting gas to global markets, especially given its vast reserves of 133 trillion cubic feet.

Other energy supply routes involve North African countries. Algeria, investing $45 billion in oil and gas fields by 2027, could increase its gas production by 4 billion cubic meters, boosting its exports to the European market to over 50 billion cubic meters annually.

However, discussions about the feasibility of alternative routes cannot be complete without addressing the need for the appropriate political and economic environment for their implementation.

The absence of oil and gas legislation in Iraq and political tensions in Africa are all concerning factors for the future of these options.

The active role of the Suez Canal as one of the most crucial maritime trade routes in international commerce will persist. Still, the presence of military assets in the Red Sea and ongoing conflicts in Gaza will remain a worrisome factor for international trade and shipping, despite some companies advocating for it to ensure the future of navigation through Bab el-Mandeb.”

Rising Metal Prices

The Red Sea sees numerous ships loaded with metals, such as steel from South Korea to Turkey and phosphates exported from Egypt to China and India.

Recently, metal prices like copper, aluminum, nickel, and others have witnessed a significant increase due to concerns about supply disruptions caused by shipping restrictions in the Red Sea, despite joint military patrols by the U.S. Navy and other participating countries.

China heavily relies on the copper it imports for its economy. China’s imports of copper cathodes from Europe amount to 20,000 metric tons monthly, with 45% transported through the Red Sea and the rest via land routes through Russia.

The disruption of numerous shipments, combined with high demand in China, may lead to a noticeable decline in inventory, especially in the next three months. However, this impact is limited due to available alternative routes that are higher in cost in terms of transportation, insurance, and time required for shipment arrival.

Companies affected by the tension in the Red Sea handle over 50% of the global container market, contributing to the rise in commercial transport costs, delayed arrival of fuel, essential industrial goods, and some food items, especially in the Eurozone.

Investors fear that this could lead to an increase in oil prices, raising inflation levels and negatively affecting consumer confidence and Purchasing Managers’ Index (PMI).

With the decline in the stock of several major oil companies like Shell and BP, in addition to the giant shipping company Maersk suspending shipping through the Red Sea, investor sentiment in financial markets has decreased. Concerns about the return of inflationary pressures on the global economy or disruptions to global supply chains, which had just started recovering from the negative impacts of the COVID-19 pandemic, have resurfaced.”

The Military Solution or the Political One?

The significance of the Red Sea as a crucial trade route necessitates the uninterrupted flow of goods and commodities freely, given its role in sensitive supply chains. However, ongoing tensions in the Middle East and the war in Gaza pose a worrying factor for the global economy.

While the current state of the economy might not be significantly affected presently, this can be attributed to the slowing economic growth and subdued demand due to inflationary pressures in various global economies.

Moreover, the adaptation of supply chains post the COVID-19 pandemic renders the current situation in the Red Sea cautious but not yet perilous. Navigation through this route continues, albeit impacting major shipping companies, raising costs, insurance premiums, fuel prices, and extending delivery times for numerous maritime shipments.

Although protecting this trade passage through the formation of a maritime military alliance led by the United States and allied nations would help alleviate concerns among global traders and investors, there’s a fear that militarizing these waters might turn commercial waters into a military battleground, risking real conflicts in case of any assault on ships.

Therefore, it’s imperative to exert pressure toward addressing the root cause of the problem and halting military operations in Gaza, respecting the United Nations’ resolutions on this matter. Without such actions, this conflict may escalate, widen, and have catastrophic consequences for the region and the world at large.”