Many of the world’s biggest shipping and oil companies are diverting their ships from the Suez Canal trade corridor, citing security concerns over attacks by Huthi rebels in the region.
The danger to merchant ships passing through one of the world’s most critical trade routes has raised concerns among government officials worldwide, who are debating the creation of a multinational task force to protect maritime traffic. American and European officials are working on a plan based on of which a naval escort service will be established in the Red Sea.
In fact, for this purpose they are trying to secure the support of Saudi Arabia and the United Arab Emirates, the two main players in the Yemeni civil war. Oil giant BP was the latest company to divert its tankers from the Red Sea crossing following attacks by Yemen’s Iran-allied Huthi forces.
Several of the largest boxship owners (A.P. Moller-Maersk, Hapag-Lloyd, MSC and CMA CGM) also decided to choose other corridors.
The three major shipping alliances, made up of the world’s top 10 boxship players, have issued a notice on Red Sea routes, requiring vessels to change course. It is noted that an average of 17 ships cross the Suez Canal daily.
Brokers say it is now around 14, even though the Suez Canal is operating normally. The conflict between Israel and Hamas has, until now, barely disrupted global maritime trade flows beyond disrupting small volumes shipped in and out of Israel. The oil was still passing through the Red Sea.
However, following BP’s withdrawal, traders and brokers said they were concerned that other major shipping and trading companies could follow suit.
The Concequenses
For the global economy, the disruption of shipping in the Middle East means that the slowdown in transit through the Panama Canal due to low water levels will intensify.
If the Red Sea becomes a no-go zone for most tankers, the energy crisis will resurface for the second time in two years after the war in Ukraine and related sanctions forced Russia to find new markets.
Logically, in this case, there will be a boom in oil prices and tanker rates. Against this backdrop, Brent crude futures, the global benchmark, rose 2.5% to around $78 a barrel in trading on Monday, December 18. Tanker charter costs in the region also rose as shipowners scramble to pass on the higher insurance costs to those who charter their boats.
That boosted shares of tanker owners including Frontline and Tsakos Energy, which rose about 3 percent and 4 percent, respectively, in U.S. trading. The situation is getting serious, so some tankers will have to be diverted until an international escort force can appear for protection. It will significantly slow down the passages, this escort power, but they will become much safer.
The Red Sea separates Africa from the Persian Gulf and abuts Egypt’s Suez Canal to the north and Bab el-Madeb to the south. According to the US Energy Information Administration, these two straits, combined with the Sumed pipeline through Egypt, accounted for 12% of all oil moved by sea in the first half of 2023.
About 8% of the world’s LNG trade also passes through these routes. In mid-November, the Huthi group said it would attack Israeli ships while this month it said it would expand that threat to prevent all ships from passing through to Israel – if more humanitarian aid is not allowed to pass through to Gaza. Huthi forces attacked ships that have nothing to do with Israel. Instability in northern Somalia increases the risk of piracy in the region.
Oil traders said there was a significant drop in the number of tankers crossing the Red Sea, which would affect the market for refined products such as diesel and gasoline more than the crude market.
At the same time, Russian crude oil and fuel once bought by refiners in Europe now sails through the Red Sea to markets in India, China, and other fast-growing Asian markets. Daily flows south through the Suez Canal have increased by about 1.5 million barrels to 4.7 million barrels a day this year, while volumes to the north rose by about 300,000 barrels a day to 3.5 million.
For shipowners and the companies that charter their vessels, there are both reputational risks and financial threats associated with shipping in an area where vessels have come under attack. Major crude carriers hold more than $150 million in oil at current Brent prices. Insurance premiums have increased, but not so high that there is a clear financial incentive for them to travel to Africa.
Shipping companies have a long history of operating in war zones, where they can charge more for their services. When international ships were attacked in the Persian Gulf during the Iran-Iraq war in the 1980s, tanker owners continued to sail in the area.
There are about 10 ships at the northern entrance to the canal — ships heading from Europe to Asia — as they assess the situation. Geopolitics shows its ugly face and shipping is its hostage.
Why are the Houthis now attacking any passing ship?
The attacks also mark a strategic opportunity for the Houthis in a number of ways:
1. By linking them to Israel’s assault on Hamas in Gaza, the Houthis can improve their standing in the Arab world where the Palestinian cause remains popular and emotions are running high. The attacks let the Houthis show, as they always claim, that they are on the side of the oppressed. Moreover, they can hit a range of targets, not just ones at home or in Saudi Arabia.
2. Second, they sent out a clear signal that the Red Sea is now a legitimate theater for the struggle against Israel and that the Houthis are even willing to go after American warships as well as commercial shipping that they may have some relationship with Israel, however tenuous. The sophistication of the attacks also shows that the Houthis are very far from being raggle-taggle group of warriors, as they have sometimes been described.
3. The Houthis have received a huge number of anti-ship missiles and drones from Iran. They have also seized and adapted some from Yemen’s regular army. The Houthis have at least 10 different anti-ship missiles in their arsenal, including sea-skimming Exocet-type missiles based on Chinese designs, such as the al-Mandab 1 and 2. These have a range of about 120 kilometers. The Houthis have the Quds z-0 and Sayad cruise missiles, too, which boast ranges of up to 800 kilometers and which have radar, infrared or electro-optical seekers to home in on their targets.
If the Houthis keep shooting, there could be increasing pressure on the Americans to go after missile sites in Yemen, assuming they could be found. Yet the last thing US will want is to be dragged into Yemen’s civil war, which Joe Biden’s administration has recently been trying hard to dampen down.
