Code Red: Red Sea crisis may hobble the global economy

A picture taken from southern Israel near the border with the Gaza Strip on December 18, 2023, shows smoke rising over the Palestinian territory following Israeli bombardment amid the ongoing conflict between Israel and the Palestinian Hamas militant group. (AFP photo)

The rise in attacks on ships in the Red Sea by Houthi rebels have increased fears about a looming disruption in global supply chains, which could make the price of oil and other essentials jump sharply and adversely affect the global economy.

The Houthi attacks on the ships are a fallout of the Israeli military action on the Palestinians in Gaza since the war began on October 7, in which over 18,000 people, overwhelmingly Palestinians, have been killed.

If the attacks go unabated it could expand the ongoing conflict and draw in other countries.

The Mediterranean Shipping Company (MSC), the world’s largest shipping group, announced this weekend that they were suspending operations in the Red Sea until further notice in the wake of the attacks.

Danish shipping giant Maersk, German company Hapag-Lloyd, and French firm CMA CGM have already suspended their Red Sea transits. Their decisions signal that major global shipping corporations are taking the security situation in the Red Sea very seriously.

A prolonged uncertainty could adversely affect not only the world’s oil market, but also the global economy, which has been struggling to get back on track following the pandemic and the Ukraine war.

If the Red Sea remains unstable, it would force shipping companies to significantly increase the insurance to continue transporting goods in the region. Or, they would find safer routes that are more time-consuming and expensive.

According to the Associated Press, insurance costs have doubled for vessels passing through the Red Sea. It said that the most expensive ships (in value of goods) would have to pay hundreds of thousands of dollars more per journey, which, ultimately, would impact the consumer.

A lot depends on how global players respond to the crisis in the Red Sea, which carries nearly 40 per cent of the global trade.

The sea route is also extremely important for the two Asian giants — China and India — since much of their energy and trade with the Gulf and other countries passes through this channel.

The Houthi rebels, backed by Iran, have been in control of Yemen since the 2014 war between the rebels and the government forces began.

Since the Gaza war, Fears have mounted as the Houthis have stepped up assault on ships with drones and missiles. They have attacked at least eight ships in Bab el-Mandeb — the strait along the coast of Yemen. The rebels have targeted vessels that are either owned by Israelis or are carrying cargo to Israel through the Red Sea. In November, a Japanese-operated cargo vessel headed for India was hijacked by the rebels.

“We will continue to prevent ships from heading to Israeli ports until the food and medicine our people need in Gaza is brought in,” the Houthis said in a statement.

US response

The Joe Biden administration has shown growing concern to the evolving situation in the Red Sea, and has decided to send Defense Secretary Llyod Austin to the region. He is likely to talk to Israeli Prime Minister Benjamin Netanyahu and also visit Kuwait and Qatar — two of America’s closest military allies in the Gulf.

Earlier, US National Security Adviser Jake Sullivan, who visited the region, said the Houthis were threatening the freedom of movement in the Red Sea, vital for massive oil and goods shipments. Blaming Iran for instigating the rebels, Sullivan said, “While the Houthis are pulling the trigger, so to speak, they’re being handed the gun by Iran.”

Sullivan said the US was working with the international community and partners from the region to deal with this threat. A task force comprising like-minded countries could be set up to patrol the area to ensure the supply lines remain free of attacks.

Pressure mounting on Iran

Though Iran has denied any involvement in the attacks, it has been facing increasing pressure not only from the US, but also from partners like China and India.

Iran has so far refused to get involved in the war against Israel.

But it is widely believed that its proxies in the region who form part of the “Axis of Resistance,” who have been involved in Iraq, Lebanon, and Yemen, have engaged in low-level conflict with Israeli and US assets in the region.

However, China, Iran’s biggest investor and trade partner, would like to avoid a crisis that would slow down its economic recovery. And India, which will be facing a crucial parliamentary election next year, would not like any further disruption to its supply chain, which will adversely affect the Indian economy.

Nearly 5,00,000 barrels of crude is shipped daily to India through the Red Sea, and nearly $ 240 billion — or nearly 15 percent of its global trade — passes through the Red Sea and the Suez Canal.

Therefore, pressure will be on Iran to use its influence on the Houthis to stop the attacks on the ships passing through these vital sea lanes.