Houthi attacks in the Red Sea have shifted global trade routes – economies and consumers will suffer

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When the Israel-Hamas war started on Oct. 7 and grew more vicious by the day, oil prices rose US$5 a barrel, triggering predictions of a new energy crisis on top of the one that began a year earlier with Russia’s invasion of Ukraine. The scare proved overblown. By late October, oil was sinking fast, in good part because there was little sign the Middle East was on the verge of a full regional war.

But on Nov. 19, when oil was still losing value and the war remained largely contained, a daring event unfolded in the Red Sea. A Soviet-designed Mi-17 military helicopter, with a Palestinian flag emblazoned on its rear fuselage, took off from Houthi-controlled northern Yemen and landed on the deck of the Galaxy Leader, a large car carrier en route from Turkey through the Red Sea to India.

Commandos armed with AK-47 assault rifles took control of the ship, which was operated by a Japanese shipping company and had 25 crew aboard, and sailed it to Al-Hudaydah, the principal Yemeni port on the Red Sea. It is still there and has become a tourist attraction. The Houthis, who are empathetic to the Palestinians and despise Israel, claimed the ship had an Israeli connection.

What happened in the following weeks was equally extraordinary. The Houthis, who are variously described as being linked or aligned with Iran, or supported by it, launched drone and missile attacks on ships plying the Red Sea, though no vessel was sunk or seriously damaged. Today it appears the Houthis in effect control the sea, in the sense that some of the world’s biggest shipping companies consider it a no-go zone. Most of their ships travelling from Asia to the Mediterranean through the Suez Canal, and vice versa, are being diverted around South Africa’s Cape of Good Hope, which can add weeks and millions of dollars in cost to any ship’s voyage.

In other words, the Israel-Hamas war is no longer contained, at least in the economic sense. It has gone global because shipping is global. Oil prices are rising again – they hit US$80 a barrel Wednesday, up US$6 from their week low – because tanker ships are avoiding the Suez-Red Sea route. Meanwhile, container fees are soaring because of the added fuel, crew and insurance costs. The disruption of global trade flows will almost certainly put upward pressure on inflation rates just as they were cooling in many countries.

Some shipping analysts think the Red Sea is set to become more dangerous as the Israel-Hamas war enters its third month with no end in sight. In the past few days alone, shipping rates have reportedly climbed about 20 per cent.

U.S. seeks ‘broadest possible’ Red Sea maritime coalition against Houthi attacks

How would the Red Sea attacks affect gas shipping?

“The region is essentially in a war situation because it is too dangerous for many vessels to sail through the Red Sea and therefore also the Suez Canal, which is the major artery for world trade,” said Peter Sand, the chief analyst at Xeneta, a Norwegian ocean and air freight analytics firm, in an article published Tuesday on its website. “There is [enough] capacity in the market, but it will come at a cost, and we could see ocean freight shipping rates increase by 100 per cent. That is a cost that will ultimately be passed onto consumers.”

The Suez-Red Sea is a crucial transit point for energy – oil and liquefied natural gas (LNG) – and freight.

The U.S. Energy Information Administration says the route accounted for 12 per cent of the seaborne oil trade in the first half of this year and 8 per cent of the LNG trade. In recent months, oil shipments through Suez and the Red Sea had climbed because Russia, having all but lost the European oil-export market, had been making up the difference by sending more tankers to Asia, especially India. According to shipbroker Clarksons, more than 20 per cent of the world’s container trade passes through the Suez Canal.

The Houthi threat should not be underestimated. In a statement published in English on Tuesday, a spokesperson for the Houthis said the movement was only interested in attacking ships linked to the “enemy” Israel, evidently meaning ships with Israeli owners or carrying cargo to or from Israel. But how would they know for sure the identity of the owners? The shipping world is notoriously opaque, with true ownership often disguised under layers of offshore companies.

Certainly, the big shipping companies are not taking any chances. Denmark’s Maersk, operator of the world’s second-biggest container-shipping fleet, on Tuesday said its vessels would be diverted around the Cape of Good Hope because of the “highly escalated security situation” in the Red Sea. Taiwan’s Evergreen Marine is doing the same, announcing it has “decided to temporarily stop Israeli cargo with immediate effect.” Germany’s Hapag-Lloyd is also diverting ships around Africa, and BP, one of the world’s biggest oil companies, stopped all oil shipments though the region Monday.

In response to the Houthi attacks, the U.S. Navy has essentially gone on a war footing in the Red Sea. On Monday, U.S. Defence Secretary Lloyd Austin announced Operation Prosperity Guardian, a coalition task force to protect shipping through the Red Sea and the Gulf of Aden. But the size of the force, and thus its ability to protect merchant vessels, was unknown by midweek. Only a few European Union countries are participating in the operation, as is Canada. How many navy ships they will send, if any, was not immediately known. If the fleet is small, there will be holes in the defence net that the Houthis may be able to exploit.

What is known is that the longer the Red Sea remains a danger zone, the higher shipping rates will climb. Since most traded goods are transported by sea, the increased rates will affect every aspect of the global economy.

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