Oil prices have already risen, and this is just the beginning of the economic storm that could mark 2024.

There is no peace in the Red Sea. Since Yemeni militants, the Houthis, began attacking commercial cargo ships in early October, transoceanic carriers have been avoiding Bab al-Mandab, the strait that connects the Red Sea to the Arabian Sea and leads to the Suez Canal. The problem is that this strait borders Yemen on one side and Djibouti and Eritrea on the other, and the Houthis, a Shiite minority sect in Yemen, who took control of large parts of the country back in 2014, including the capital Sana and the key port on the Red Sea, Al-Hudaydah, are under Iranian control. After all, like Hamas, which is why it is not surprising that terrorist operations in the Red Sea began when Hamas attacked Israel.

Of course, what followed is genocide against the Palestinian people, and the Houthis believe that by attacking the foundations of global trade, they are helping their Palestinian brothers. Namely, nearly twelve percent of global maritime trade passes through the strait leading to the Suez Canal. The Houthis use drones, helicopters, rockets, and projectiles in their attacks, and their militants often board commercial ships. They steal cargo, take crews hostage, seize ships… The situation has escalated to the point that shipowners have decided to avoid the Red Sea.

Around and about

Ships, despite the fact that the crews of some shipowners signed an agreement to consciously enter a high-risk area, for which they received a significant pay increase in return, are rerouting their routes. As long as the attacks continue, transoceanic commercial shipowners are rerouting their fleets to the African Cape of Good Hope, which was the natural route before the Suez Canal existed. Longer journeys increase fuel costs, reduce transport efficiency, and consequently, it is clear that they will increase the prices of imported goods. Deliveries of oil, LNG, and other energy sources, as well as food products such as palm oil and grains, are affected, and a rice shortage in Europe is already being mentioned. Additionally, rerouting around Africa extends the journey by six to fourteen days, and this is happening at a time when another major trade shortcut, the Panama Canal, is suffering from drought, which only increases potential risks for the global economy.

Oil prices have already risen, and this is just the beginning of the ‘perfect storm’ that could mark the economic course of 2024. Rerouting ships around the Cape of Good Hope assumes that cargo costs for transoceanic carriers will rise by 15 to 20 percent. Insurance premiums for commercial vessels are also rising, as is fuel consumption. Environmental activists have calculated that rerouting increases CO₂ emissions by 20 to 35 percent for each ship. Some companies also have to pay an additional fee for each cargo, ranging from $500 (449 euros) to $1,000 (899 euros). All this just means that consumers will feel the consequences.

A new blow for Europe

All this could result in a serious global crisis, warn economic analysts around the world. Regions that depend on energy imports such as LNG will suffer the most, especially low-income countries, and the greatest impact of these challenges could hit Europe, which is teetering on the brink of recession and struggling to contain inflationary pressures. Rising oil and gas prices would keep overall inflation in Europe high, complicating the efforts of the European Central Bank to focus on easing.

– The situation is concerning in every sense, especially when it comes to energy, oil, and gas. Demand for marine fuel is expected to rise by five percent, and higher fuel prices, increased transportation costs, and higher insurance premiums ultimately mean higher prices in supermarkets – said Fotios Katsoulas, chief tanker analyst at S&P Global Market Intelligence.

If we talk about the sum of losses, it should be clear that more than 19,000 commercial ships pass through the Suez Canal every year. When the container ship Ever Given ran aground in March 2021 and blocked the Suez Canal for six days and seven hours, the total damage was over ten billion dollars. A complete disruption of passage through the Red Sea and consequently the Suez Canal for several weeks or months would cause losses of hundreds of billions of dollars. That is a scenario that no one wants!

The West has no real answer

The West’s response to Yemeni militants and the threat to global trade is lukewarm: the establishment of the maritime operation Prosperity Guardian, in which the United States is joined by the United Kingdom, France, Italy, the Netherlands, Norway, Spain, Canada, Bahrain, and the Seychelles. Greece has also confirmed subsequent participation. In short, the operation involves sending warships to protect commercial vessels in the strait in the Red Sea. However, the roles of all the mentioned countries will not be equal. The most warships will be provided by the U.S. (at least three destroyers) and the British Navy (a destroyer and a frigate). Greece has announced the dispatch of one frigate, and France is likely to do the same. Other countries will support the operation with personnel.

Although the largest economic power in Europe, whose economy heavily depends on the uninterrupted flow of global maritime routes, Germany has not yet joined the coalition. The red-yellow-green coalition of Chancellor Olaf Scholz struggles to make even much simpler decisions than sending warships to war. However, German media report that Scholz’s government is inclined to participate, but since such a decision must be approved by the Bundestag, Scholz is actually afraid that the representatives will not support him, which would only shake his position. However, the media also emphasize that it is a public secret that the state of the German Navy is alarmingly poor and that those ships that can sail do not have enough personnel and ammunition.

So far, there is no sign that the situation will calm down and that the Houthis will wave ships with containers or tankers from the Yemeni shores, at least not while they are armed and hungry for revenge. And that means that serious disruptions are a geopolitical and economic risk with which we enter the new year.