PHILIP PILKINGTON
Houthi attacks on commercial shipping vehicles in the Red Sea have now reached a critical point, with many global shipping companies stopping their vessels from moving through the area. The decision was first taken by Danish shipping giant Maersk and Germany’s Hapag-Lloyd, now followed by French company CMA CGM. The companies decided to cease passage through the Red Sea after the container ship MSC Palatium III was attacked by a Houthi suicide drone on Friday.
The situation in the Red Sea has been escalating for some time. Last month the Houthis, who control most of Yemen and are backed by Iran, seized the ship Galaxy Leader and imprisoned the crew. The Houthis said they would be targeting any ship linked to Israel in an act of support for Hamas. Since then, it appears that the group has broadened its net and is now trying to disrupt global shipping flows.
The Biden administration has been keen not to highlight the problems in the Red Sea, recognising that doing so would risk pulling the United States into what could become a regional conflict in the Middle East. The administration has also been ignoring increasingly frequent targeting of American bases in the region: recent reports suggest that since 17 October there have been 92 such attacks.
But the attacks on ships now clearly threaten to throw sand in the gears of global trade. The Bab al-Mandab chokepoint in the Red Sea accounts for 10% of global seaborne oil flows and also a large amount of liquefied natural gas. The alternative route, which involves sailing around the entire African continent, adds 40% to the voyage’s distance.
The main economic risk that this introduces is to delay the arrival of key goods which would lead to shortages and inflation. Similar happened when global supply lanes were interrupted by the pandemic in 2020. This will pose difficult problems for the Federal Reserve, which last week surprised markets by saying that it would lower interest rates in 2024. This came as good news for President Biden, who trails Donald Trump in the polls due to severe economic pessimism amongst the electorate.
Oil markets also seem likely to be affected. For weeks, oil traders have been driving down energy prices despite Opec+ signalling that they would be cutting production and increasing tensions in the Middle East. Much of this appears to have been due to the preponderance of algorithmic trading in the market. It is certainly possible that oil markets continue to ignore the realities of supply and demand, but it will become increasingly difficult to do so as global shipping is disrupted. This, too, will impact Biden’s chance of re-election as energy prices are a hot political topic in America.
Just as in the 1970s, conflict in the Middle East is threatening to give rise to chaos in the energy markets and rising inflation. The Biden administration has no easy options on the table. Intervening directly in the region will drag the United States into a conflict it simply cannot afford. Yet failure to intervene will result not just in economic pressures, but also in other countries calling into question the viability of American security guarantees.
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