Red Sea Crisis

The Red Sea has long served as a vital artery for global maritime trade between Europe, Asia, and the Middle East. Located between the Horn of Africa and the Arabian Peninsula, it provides access from the Indian Ocean to the Mediterranean via the Suez Canal. About 12 percent of all global trade passes through the Suez, including nearly 10 percent of seaborne oil shipments.

The Red Sea route enables much shorter journey times between Asia and Europe compared to alternatives like sailing around the Cape of Good Hope. Prior to the canal’s opening in 1869, that latter route was the standard, taking up to three months. Transit through the 120-mile Suez slashes typical Asia-to-Europe journey times to just three weeks. No wonder over 50 ships traverse the canal daily, carrying everything from oil to manufactured goods to raw commodities. Traffic through the Red Sea has steadily risen in recent decades to match expanding world trade volumes. Maintaining safe passage through this corridor is thus essential for international commerce.

Attacks by Houthi rebels

Since late November 2022, Houthi rebels in Yemen have significantly escalated attacks on commercial vessels traversing the Red Sea corridor near the Bab el-Mandeb Strait. Using bomb-laden drone boats and missiles, the Iran-backed militants have repeatedly targeted tankers and cargo ships in the narrow Gulf of Aden and southern Red Sea. These assaults appear aimed at pressuring a Saudi-led coalition supporting Yemen’s government against Houthi forces in Yemen’s civil war.

Major shipping firms have reacted by suspending Red Sea traffic and rerouting vessels around the Cape of Good Hope, adding weeks of transit. But attacks persist, with a Houthi helicopter assault thwarted by US Navy intervention on January 1st. Over a two-month span, strikes have gone from targeting mostly energy tankers to also impeding container and general cargo traffic. The economic risk is clear: continued disruption to this critical trade artery could choke supply chains, raise delivery costs, and weaken the world economy if unresolved. Hence resolving this crisis is an international priority.

Volume of shipping through route

Around 12% of total global trade worth over $1 trillion passes through the Suez Canal and Red Sea corridor annually. This includes about 8% of global seaborne oil shipments, valued at over $400 billion per year. Over 50 vessels traverse the route daily – nearly 20,000 ships a year – making it the world’s busiest shipping lane. These include various vessel types like bulk carriers, container ships, oil and chemical tankers, and more. Traffic volumes have grown steadily for decades and are projected to continue rising between 3-4% annually amid expanding world trade. But alternate routes cannot match the efficiency of the Red Sea route.

Share of global oil trade passing through

Nearly 10% of total seaborne global oil trade, equivalent to roughly 5 million barrels per day, flows through the Suez Canal’s pipeline and onboard tankers sailing the Red Sea. That represents close to 9% of total world oil production. A majority of this Red Sea oil traffic heads toward Europe and North America from Gulf nations like Saudi Arabia, Iraq, Kuwait, and the UAE plus other Middle East producers. With many countries still hugely dependent on oil imports, any extended disruption along this corridor risks fuel shortages and price spikes around the world.

Role of Red Sea as conduit between Asia and Europe

The Red Sea shipping lane serves as the linchpin trade bridge connecting Asia with Europe. It enables much faster transit between the two continents via the Suez Canal compared to alternate routes like sailing around Africa. Prior to its opening, that latter journey took up to three arduous months. The Suez slashed standard journey durations to just three weeks between Asian manufacturing hubs and European markets. Red Sea access drives the cost-competitiveness critical for Asian exporters reaching Europe. In turn, European importers depend on Red Sea shipments for raw materials and finished goods from Asian trade partners. The route’s smooth functioning is thus essential for cross-regional and even global supply chains.

Alternative routes and why they are not adequate substitutes

The main alternate sea route bypassing the Red Sea and Suez Canal entails sailing around the Cape of Good Hope at Africa’s southern tip. This adds over 5,000 kilometers (+30%) to the journey from Asia to Europe, translating to 10+ extra days of sailing. Fuel and labour costs also rise substantially over such distances. In addition, piracy risks have resurged off Africa’s east coast, while storm exposure heightens around the Cape itself. Finally, there is insufficient capacity along secondary routes like arctic shipping lanes or the land bridge across Eurasia. Limited cargo rail links, costs, and Russia-related risks hamper the latter. For all these reasons, circumventing the Red Sea comes at a heavy economic price the global economy can ill afford.

Timeline and details of attacks on commercial vessels

Houthi rebel forces in Yemen escalated assaults on commercial ships in the Red Sea corridor in late November 2022. Using bomb-laden drone boats and anti-ship missiles, they targeted multiple oil tankers and cargo vessels over the subsequent two months. Attacks turned increasingly brazen, hitting ships off the Saudi port of Jeddah and culminating in a foiled helicopter raid on a tanker on New Year’s Day 2023. At least four ships have suffered damage, while many more reported rocket and drone sightings. Experts believe the militants used new weapons with expanded range and precision compared to prior assaults in the region. Collectively, these incidents mark a dangerous threat to free navigation along the Red Sea route.

Shipping companies’ reactions and rerouting decisions

In response to the intensifying Houthi attacks, major carriers like AP Moller-Maersk, Hapag Lloyd and CMA CGM announced suspension of Red Sea transits in early January. They began redirecting vessels around the Cape of Good Hope despite the far longer journey times involved. However, the mirrored response across firms leaves little slack capacity to absorb added traffic along the Africa detour. Bottlenecks, delays, and raised costs are inevitable. Some tanker operators persist with Red Sea passages given security precautions like naval convoys. But most firms judge the risks still too severe presently, hence the widespread rerouting.

Immediate impacts on shipping times and costs

These collective rerouting decisions immediately impacted delivery schedules and shipping economics. The journey from Asia to Europe can now add up to 10 days in transit time and thousands more kilometers in distance. Costs also escalate from higher fuel consumption, increased piracy risk premiums, and more. Some estimates suggest up to $1 million extra per one-way trip from Asia to Europe. The pressures risk spilling over into higher consumer prices as importers pass on their added freight expenses. Port congestion also looms as vessels rerouted from the Red Sea join existing Africa traffic flows. The overall impacts threaten to compound existing strains on global supply chains.

Rising fuel and insurance costs for shipping companies

The lengthy Africa detours being pursued to avoid rebel threats in the Red Sea will significantly increase fuel costs for shipping companies. Vessels traveling at slower speeds for longer distances burn far greater quantities of bunker fuel. One estimate puts the added fuel bill at up to $1 million per Asia-Europe roundtrip. War risk and piracy insurance premiums also look set to rise. Combined with reduced sailing frequencies between Asia and Europe, shipping firms face a margin squeeze from soaring operating costs. Some companies could be forced out of certain routes if conditions persist.

Potential for higher inflation due to cost increases

With higher shipping expenses ahead, importers will likely pass many extra costs on to consumers in the form of broad price increases. If transportation bottlenecks drag on, this second-order inflation effect could be substantial. The IMF estimated supply chain woes during COVID added nearly 1 percentage point to global consumer inflation. Any renewed input cost spikes or imported goods shortages risk reversing the recent cooling in OECD inflation. Central banks may then feel compelled to keep interest rates higher for longer.

Delays and congestion effects on ports worldwide

The sudden influx of Asia-Europe traffic now having to sail around Africa could swamp port capacities. The continent’s west coast container terminals are ill-equipped to handle such volumes from larger transcontinental vessels. Queue times may therefore lengthen substantially at docks across eastern and southern Africa. Ship turnaround times look set to rise, with knock-on impacts on global port productivity and inland distribution. Supply chain resilience gains made over the past year could erode amid renewed congestion and bottlenecks.

Impacts on oil and commodity markets

While alternate routes exist for most non-oil seaborne trade, tanker traffic is more captive to the Suez Canal pipeline’s rerouting limits. Removing over 5% of global oil shipments from markets risks supply shortfalls in importing regions like Europe and North America. Energy price volatility may also follow. Thermal coal, grain and metals markets could face similar shipment and pricing effects given lower bulk carrier frequencies between Asia and Europe.

Comparison to previous shipping disruptions

The economic risks today resemble previous Suez Canal disruptions like the 1967 Arab-Israeli War or the 2021 Ever Given grounding crisis. However, the impacts may prove more enduring given current rerouting challenges. Alternate capacity around Africa and across Eurasia remains highly limited for the enormous Asia-Europe volumes at stake. What sets this event apart as well is its manmade trigger. Continued rebel attacks despite security efforts would further undermine shipper confidence in the Red Sea route. Full reversion anytime soon seems unlikely until the maritime security situation stabilizes.

Pressures on strained global supply chains

Extended shipping delays and cost increases arising from Asia-Europe rerouting could reverberate through intricate global supply chains. Manufacturers dependent on Chinese intermediate inputs or European sales would suffer squeeze effects. Inventory restocking would grow more difficult amid transport headaches. Supply chain resilience improvements after the pandemic may unravel, reviving shortages, logjams, and inflationary pressures.

Dampening effect on global trade volumes

Higher freight expenses and reduced reliability of shipping routes tend to dampen trade volumes as firms cut back activity levels. One academic study found a 10 percent increase in shipping costs reduces long-run trade volumes by about 3 percent. Prolonged Red Sea insecurity could thus weigh on trade flows between major partners like China and the EU. In turn, weaker trade drags on global growth.

Risks of economic slowdown if crisis drags on

Between depressed trade volumes, renewed supply chain turmoil, and potential consumer price spikes, global economic headwinds would intensify should disruption drag on. Central banks may then feel compelled to maintain tighter monetary policies even as growth stalls. The combined impact raises recession risks, especially in exposed regions like Europe. Renewed economic weakness would ripple across Pacific and Atlantic trading partners alike.

Impetus for companies to reevaluate and diversify supply chains

The sourcing strategies many firms adopted by concentrating production capacity in low-cost nations like China are being tested by transport snarls in channels like the Red Sea. The crisis provides fresh impetus for companies to distribute manufacturing and sourcing across more locations to mitigate trade corridor risks. Governments may also assist domestic suppliers to ensure alternatives exist when overseas routes falter.

International efforts to ensure freedom of navigation

Key actors like the United States and China have strategic interests in keeping Red Sea routes open. Coordinated international efforts may aim to deter further rebel interference through shows of force and escorts while pushing for Yemen peace talks. The UN could spearhead multilateral negotiations amid the evident global stakes. However, bridging divides between Iran and Saudi Arabia will prove hugely challenging diplomatically. Without real progress silencing arms fueling Yemen’s civil war, restoring calm in the Red Sea corridor may remain elusive.

Possibility of naval escorts for commercial vessels

Military options like having warships escort major oil and cargo carriers could provide safety assurings to resume Red Sea transits. Indeed, some tanker operators are already implementing convoy systems after receiving security assurances. But escorting enough commercial traffic to restore route flows would require enormous naval resources from willing partners like the US and allies. Costs and deployment hurdles limit fleet capacities. Any sustainable solution still demands resolving the Yemen proxy conflict’s root causes.

Challenges of stabilization and conflict resolution in Yemen

Yemen’s civil war since 2014 has entrenched deep divisions and created the world’s worst humanitarian disaster. Prior talks have failed to deliver peace or stability with Saudi and Iranian interests pulling strings. Amid fighting fatigue, both Houthi and Yemeni government leaders may welcome fresh negotiations. But compromise remains hugely difficult on issues like transitional governance, disarmament, territorial control and access to national resources. Extensive international mediation looks vital to cementing any power-sharing resolutions. Prior ceasefire deals provide tentative templates if talks commence. But the proxy nature of the conflict complicates self-determined solutions.

India’s role, impacts and response to the recent Red Sea shipping crisis

The Houthi rebel attacks on commercial vessels over the past month have directly implicated India’s interests. With Indian crew aboard two targeted ships in late December – MV Chem Pluto bound for Mangalore and MV Sai Baba en route to India – New Delhi grasps the country is no longer isolated from distant conflicts.

Defense Minister Rajnath Singh has vowed “strict action” against those responsible for the assault on MV Chem Pluto by a bomb-laden drone boat. While investigations continue into potential Iranian involvement, India remains concerned about securing maritime commerce through the Red Sea and Arabian Sea.

Beyond crew safety, the economic stakes are high. India relies heavily on the Red Sea route for both its $800+ billion in annual merchandise exports and substantial crude oil imports from the Middle East. Shipping rerouting and delays add to import costs just as inflation pressures ease. Airline freight rates between India and Europe have already jumped nearly 20% as firms detour from sea passage.

To contain crisis impacts, India has deployed naval destroyers, aircraft and choppers to bolster surveillance and preventative force. Coordinating intelligence and patrol duties with the American-led “Operation Prosperity Guardian” coalition and other partners has become a priority as well. While not a formal member, India’s presence guarantees stakes in preserving Red Sea stability.

Indeed, India’s reliability as a net security provider is being tested by a crisis threatening the broader Indian Ocean region’s tranquility. Foreign Minister S. Jaishankar continues dialogue with US Secretary of State Blinken and others on constructive responses balancing security assurances with conflict resolution.

With globalised trade exposing more nations to spillovers from regional unrest, insulating India’s interests will demand proactive naval deployments, astute diplomacy and rethinking strategic autonomy. But by asserting itself as an guardian of maritime stability, India can crystallize its leadership ambitions.

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