Shipping giant Maersk announced they would implement a shipping freeze in their trade routes in the Red Sea due to a high seas attack from Yemen-based Houthi militants. Despite the best efforts in the volatile Red Sea, the Israeli-Hamas conflict has spilled over to impact global trade, inflation, and oil.
Many transportation companies had already abandoned the shorter, cheaper routes through the Red Sea in exchange for more expensive pathways. Now, Maersk joins the other shipping companies, citing safety concerns for their cargo and crew. Unfortunately, the Middle Eastern conflict has profoundly affected the global economy and doesn’t seem to be getting much better. The ripple effects of Maersk’s announcement will hit world trade like a brick in the face.
The Deadly Attack on a Maersk Ship
The Maersk container ship found itself at the epicenter of a sea-based attack from four Houthi boats on Sunday, December 31st. The attack initially came from an unknown aircraft, then quickly evolved into a naval battle with the Iran-backed Houthi boats firing on the cargo vessel.
Fortunately, the US military was quick to respond and engage the attackers from a US Navy helicopter. Naval officers sank three of the four fighting vessels, killing ten Houthi militants. Despite the high stakes of the sea battle, no Maersk personnel were seriously injured. Still, this event marks the first time the US military has returned fire on the Iran-backed Houthi.
The naval attack comes in a series of militant aggression from Houthi forces towards shipping vessels. Due to the rise in tension from the Israeli-Hamas conflict, the US military and other factions Initiated Operation Prosperity Guardian to help mitigate the security risk around the Red Sea. However, the recent uptick in hostilities had shipping companies more than concerned about escalation should they continue transporting through the Red Sea route.
The Importance of the Red Sea Trading Route
The Red Sea route represents a pivotal route for trade and oil companies, as it dramatically shortens the journey from Middle-Eastern oil refineries and global shipping lines. Bridging the gap between Northern Africa and the Arabian peninsula, this critical waterway connects the Mediterranean Sea to the Indian Ocean.
With much of the world’s trade in oil and goods passing through this maritime passage, commerce, inflation, and shipping costs heavily rely on the viability of the Red Sea. In ancient days, this route represented the connection between major world powers, including Egypt, Greece, and Rome.
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Because of the Red Sea’s centrality to world trade, any disruption or cessation of its waters can impact the global economy, devastate trade, and increase oil prices. Maersk was one of the few companies that opted to continue operations in the Red Sea, hoping the area would become more secure as time progressed. Unfortunately, hostilities have only increased, leading to global questions of security and trade ramifications.
“A Clear Impact on World Prices”
Oil companies, like BP, were forced to change routes to a much longer and more costly shipping pathway. With the only alternative being sailing through potentially dangerous waterways, most shipping companies and oil transporters opted to take the longer option and stick to safer transport.
While there are alternate routes, none are as lucrative or pivotal as the Red Sea, which connects to the Suez Canal. As companies were forced to alter routes or increase shipping distances, the cost of oil and transportation increased almost immediately. Shipping companies are not only suffering from longer transportation routes but also increasing security on their vessels to account for the potential hostilities they may encounter.
The December 31st attack proved the necessity of increased security in the Red Sea. The aftershock of the deadly maritime attack has many concerned about global trade routes and what may be next for transportation corporations.
A Pivotal Oil Route Disrupted
Maersk, halting routes through the Red Sea, deals in line with other companies’ similar decisions from other goliaths in the area. After the maritime attack, fears rose that the security of the Red Sea was waning. Roughly 30% of the world’s container commerce flows through the Red Sea and Suez Canal, making a disruption a devastating turn of events.
In addition to the container shipping that runs through the Red Sea, the Middle Eastern shipping route is one of the busiest oil transportation waterways in the world. Moreover, the shipping room contains multiple choke points for oil, natural gas, and transportation, making prolonged alternate routing extraordinarily costly and frustrating for oil companies.
Oil and natural gas prices surged when BP stopped shipping through the Red Sea following the attack.
“In light of the deteriorating security situation for shipping in the Red Sea, BP has decided to pause all transits through the Red Sea temporarily. We will keep this precautionary pause under ongoing review, subject to circumstances as they evolve in the region.” the oil giant said in a statement.
As hostilities continue to rise in the Red Sea and its surrounding areas, oil corporations must choose if it’s worth the risk to continue using the pivotal shipping route.
Naturally, the Houthi attack prompted economist concern over trade routes and oil supply, as insurgents continue to disregard strong warnings against further action targeting commercial and crude shipping lines.
Shipping Container Shortage
A Maersk executive said that after the attacks, the events are leading to more troubles for container shipping, including a massive container shortage. The price of containers continues to spike after the Red Sea crisis, leading to complications and shipping and an estimated cost increase of at least 15%.
Additionally, the added risk has caused insurance companies to raise risk evaluations for shipping companies, leading to further inflation hikes. This price increase will happen suddenly and immediately trickle down to consumers.
Moreover, the increased shipping time will result in delayed deliveries worldwide, which could strain supplies from shipping containers. This delay will affect everything from toys to food, medical supplies to technology. The larger impact will have untold ramifications, affecting every area of life.
A Wider Impact
The Iran-backed terrorists in Yemen threatened to continue attacks on naval vessels, mainly any ship transporting goods to Israel or leaving Israeli ports. There is little hope of de-escalation at this point, with Houthi fighters pledging an increase in hostility and Military action.
Unfortunately, a broader impact will be felt throughout the world’s economy due to Houthi initiatives. By essentially pirating the Red Sea, Houthi forces have struck a significant blow to global economic stability and caused prices of goods shipped via container vessels to soar.
How Other Transportation Companies Responded
Maersk is far from alone in avoiding the Red Sea these days. Reuters reports German container transport company Hapag-Lloyed is rerouting 25 ships to avoid the hot spot, while Hong Kong’s OOCL is taking similar action following the increase of high seas attacks. The new routes these and other companies are taking will be much longer, more expensive, and less lucrative for shipping companies.
Container shipping costs are set to increase as more corporations turn away from the Red Sea in light of the hostile environment and potentially dangerous situations. With the Red Sea and Suez Canal shipping lanes less opportunistic, the cost of shipping containers from China to the Mediterranean is up as much as 44% due to the additional Logistics cost.
Experts say anything transported over oceanic waterways could be at risk for higher costs and inflated pricing.
Fear of Escalation
Naturally, one continued escalation is a significant factor looking forward to the Middle Eastern conflict. As Israel and Hamas continue in their brutal war, other nations have been pulled into the frey, triggering a global shockwave. Should the conflict continue and grow beyond its current scope, a major question moving forward is whether the United States and its allies will continue operations reactively or whether Operation Prosperity Guardian will take on a more active role.
Escalation of the Middle Eastern conflict would significantly impact trade as we know it. While oil tankers and shipping lines have made alternatives to their routes and positions for the time being, continued use of alternate shipping lanes could spike inflation to new and unfortunate heights.
The region where the December 31st attack took place remains heavily monitored to help dissuade Houthi forces from attacking again or another organization from joining the fight. Should the situation continue to escalate, there’s no telling what permanent ramifications would unfold.
By: Tyler Reed:
