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Iran threatens the global economy

Iran threatens the global economy

A recent wave of attacks by Houthis on ships in the Red Sea using drones and missiles threatens to disrupt the flow of global trade as major shipping companies stop passage through the Bab el-Mandeb Strait. In response, the United States created a new multinational maritime defense force. The military coalition will act as a highway police force, patrolling the Red Sea and the Gulf of Aden to respond to calls from commercial ships passing through this important international route and assist them if necessary.

Yemeni rebels are attacking the prosperity and economic well-being of nations around the world, but are they simply bandits on the international highway that is the Red Sea? The Iran-backed Houthis have indicated that their attacks will only stop if Israel ends its crimes and food, medicine and fuel reach the besieged population in the Gaza Strip. They believe that these ships have ties to Israel, against which they have declared war. In reality, the Houthis’ motivations lie in Tehran’s desire to exercise its potential – political – power in the region.

The consequences of this uncertainty and international mobilization are forcing shipowners to avoid the Red Sea and therefore the Suez Canal, which will have implications for Egypt and its neighbors (including Israel). After several weeks of the blockade, the economic impacts are already numerous. Ships have no choice but to take long detours to connect Asia with Europe, while transiting through the Red Sea and then the Suez Canal brings significant time (and money) savings. Bypassing Africa around the Cape of Good Hope means ten more days at sea. This involves additional costs. At the same time, these ships retain the right to transit through the Suez Canal, valued at $600,000 per crossing. However, the ships are used for longer periods, which reduces the savings. Not to mention the increased fuel costs. The increase in transportation costs could be between 10% and 20%.

The price of oil could also rise sharply if the blockade continues. In addition to merchant ships, many oil tankers use this sea route every day. The price of a barrel of Brent crude oil has been revised upwards due to the Houthis’ persistence in continuing their operations. In the first half of 2023, oil shipments via the Bab Al-Mandeb Strait accounted for 12% of all sea shipments worldwide.

In addition, there is a disruption in the logistics chains, which is likely to lead to significant additional costs and delivery delays. Ships that have to pass through South Africa, for example, head for ports in Northern Europe instead. And then there is the question of how to bring these container ships back to Italy or Greece. Transportation time would be longer and importers would have to pay more to tie up inventory. Between 1967 and 1975, the Suez Canal was closed and ships sailed through Africa. This is feasible, but requires more ships, fatigues crews, and is costly. Moreover, such a lockdown is less damaging to the economy at this time of the year given the dire economic situation. Demand in Europe has not seen a dramatic upturn in recent months.

However, the increasing number of barriers to sea transport has led to uncertainty among importers and exporters about traditional sea transport patterns. The “Ever Given” blockage occurred a year and a half ago (a container ship got stuck diagonally in the Suez Canal), and passage through the Panama Canal is becoming increasingly difficult due to the drought. All of this reinforces what we have seen since the pandemic, namely the vulnerability of our logistics chains and these long-distance routes.

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