Red Sea crisis threatens global supply chains

Many of the world's economic crises of recent years have been about supply chains. Pandemic lockdowns, the war in Ukraine, and the overall surge in global inflation all impacted, or were impacted by, the flow of global trade and the myriad moving parts that keep it all going.

As 2023 turns to 2024, a new threat to global supply chains has emerged in the Red Sea. The world's largest container-shipping companies have been pausing or suspending their services in the area because of the increasing number of attacks on ships there by Iran-backed Houthi rebels operating from Yemen.

Any hope of some new year's respite was shattered on January 1 when Iran sent a warship to the Red Sea after the US Navy destroyed three Houthi boats there a day earlier.

The US says it sank the three boats "in self-defense" after Houthi vessels fired on a Maersk container ship and then attempted to board the ship before the US struck. The arrival of the Iranian warship in response is a sign of potential escalation in a crisis with major potential implications for the global economy.

Oil prices jumped by more than 2% on Tuesday, the first day of trading following the attacks.

What's been happening?

Houthi rebels have been attacking ships in the Red Sea since November, claiming they are acting in solidarity with the people of Gaza amid Israel's bombing of the strip.

The attacks are taking place near the narrow strait of Bab al-Mandab, between Africa and the Arabian Peninsula. It's a critical waterway in global trade, through which just under one-third of all global container ships move daily.

Although the Houthis claim to be targeting vessels connected to Israel, they have launched more than 100 drone and missile attacks on all kinds of ships navigating the lane since November. The Maersk ship attacked on December 31 is registered in Singapore and operated by a Danish company.

The Houthis are a Shia Islamist rebel group, which have controlled large parts of western Yemen for most of the last decade. Heavily backed by Iran, they have been attempting to wrest control from the government of Yemen in the country's ongoing civil war.

In response to the attacks, which have increased markedly in intensity and volume since mid-December, the US has set up a naval task force including the UK, France and other NATO countries, as well as regional allies such as Bahrain. Known as Operation Prosperity Guardian, its stated aim is to safeguard shipping in the area.

Why the trade route is so important

The Suez Canal is located at the Red Sea's northern point and connects the waterway to the Mediterranean Sea. That makes it by far the shortest naval route between Europe and Asia. Around 12% of all global shipping trade by volume travels through the route. It's an especially important energy transit point, with around nine million barrels of oil passing through the canal each day.

The tense security situation has prompted companies such as Maersk, CMA CGM, Hapag-Lloyd and MSC to periodically pause operations in the area for the past few weeks, causing delays and driving up costs.

Hapag-Lloyd is currently rerouting its ships via the Cape of Good Hope, at the southern tip of South Africa. It says it will do that until at least January 9. A spokesperson for Maersk said on Tuesday that the company was currently considering whether or not it would indefinitely pause its Red Sea transports following the attacks and use the South Africa route.

The alternative route for ships traveling from Asia to Europe around the Cape of Good Hope adds about 3,500 nautical miles (6,482 kilometers) for a ship traveling to Europe from Singapore.

Taking that option means higher fuel bills for shippers, while insurance premium costs have also risen in response to the crisis.

Global economic implications

The risks an escalating conflict poses to the global economy are significant. If the situation deteriorates further, shipping costs will continue to soar as more and more transporters take the Cape of Good Hope option. The oil price would likely surge and the fragile recovery from high inflation would be threatened.

Another risk of escalation from direct Iranian involvement is if shipping in the Arabian Sea, south of Saudi Arabia and west of India, is also deemed to be at risk of attacks. Around one-third of the world's oil passes through these waters.

Then there's the risk of shipping delays. When the Ever Given container ship ran aground and blocked the Suez Canal for six days back in the middle of the pandemic in 2021, it added more delays to an already buckled global trade system.

Shipping companies are still hopeful that the naval taskforce will quickly restore order and thwart attacks. There is also some confidence that global supply chains are more robust than they were when pandemic shocks caused disarray in 2020 and 2021.

"Right now, we have an overcapacity of container vessels, so in the absolute worst case, where we have to continue to go around Africa for a time, we do have the container vessels in the world to do this," Lars Jenson, CEO of Vespucci Maritime, a Denmark-based shipping industry consultancy, told DW last month.

Yet global traders say that the big risk is if the crisis continues to worsen and forces ships to divert for extended periods of time. That would also likely mean a potential widening of the Middle East conflict itself — a grim portent for the global economy as it gears up for 2024.