Tensions in the Red Sea are building as the US and the UK target Houthi installations, raising the potential of a full-blown conflict that might jeopardize the global economic recovery. Europe and its citizens might anticipate increased energy prices, postponed exports, and a return of inflation, which would lead to higher and longer-term interest rates.
More difficulties lie ahead for local firms and the typical customer as a result of all these events. The troubles started when the Houthis, a Yemeni militia, began attacking commercial ships in response to the growing tensions between Israel and the Palestinians in the Middle East.
The Houthis have attacked 27 ships so far that have crossed the crucial international maritime route. Following “unprecedented Houthi attacks against international maritime vessels in the Red Sea,” US President Biden ordered the US and UK to commence an air offensive in reprisal. Coalition troops have hit 60 targets and targeted over 16 cities.
Disruption of Critical Trade Routes
This was once a localized problem, but with the US, UK, and coalition troops involved, it is now a global one. Iran has been accused by the US of supporting the Houthis. The world economy, including the EU’s, might sustain severe losses if this trend continues to worsen.
Tension has already caused oil prices to climb, with Brent reaching the psychologically significant $80 (€73.12) barrier. 8% of the world’s liquefied natural gas (LNG) and 12% of the world’s seaborne oil traffic are handled by the Red Sea.
Official estimates show that since 2020, the amount of crude oil moving through the Suez Canal has surged by 60%, mostly due to a jump in demand from epidemic lows in Europe. It’s also crucial to remember that since the EU placed sanctions on Russia due to the crisis in Ukraine, Europe has been receiving oil from Middle Eastern suppliers via the Suez Canal. A diversion caused by disturbances in the Red Sea may result in a 58% to 129% increase in the time it typically takes for oil tankers to sail through the world’s primary routes, which include India to Europe and the Middle East to Europe, according to freight data analyst Vortexa.
Rising Costs of Insurance and Shipping
However, as a result of the interruption, major shipping container companies are taking a longer route that circumvents the Cape of Good Hope and avoids the Red Sea. The cost per container has increased to $5000 (€4570) and $8000 (€7312), which is two to five times higher than the typical rate for this time of year. This has led to an increase in shipping charges. Furthermore, the diversion is increasing the typical route by around 3,500 nautical miles or 10 days, which has resulted in higher insurance rates. Xeneta reports that freight charges between North Europe and the Far East have increased by 124%. Because of this, all commodities and items transported in containers will not only arrive at their destination later than expected, but their prices will also increase accordingly. Higher prices on the shelves will result from this, which will raise inflation rates overall.
Impact on Energy Security
The present economic worries for European nations are probably going to be exacerbated by rising energy costs and supply chain interruptions. This implies that there might be major repercussions for both Europe and the rest of the globe from the Red Sea tensions. The hazards to the EU’s reputation are both real and realistic.
First, there’s a chance that an EU ship would be assaulted, which would aggravate the situation. There’s also the chance that the operation has no real effect and portrays the EU in a negative light. The Eurozone PMI, which stands at 43.8 and suggests that output fell for eight straight months, indicates that 2023 economic activity has already been dampened by higher interest rates, which can also put negative pressure on businesses.
Conclusion
The disturbances in the Red Sea may give rise to new inflationary threats, which might mean economic difficulties for Europe. According to a recent IMF analysis, 40% of the total variations in European consumer inflation during the previous two years might be attributed to import prices. As a result, end consumers are likely to bear the increased expenses of importing products from Asia, raising the possibility of inflation. In the upcoming weeks, it will be vital to closely monitor changes in the price of energy-related commodities. Even though energy commodities only make up 10% of spending in the euro area, changes in their prices might have a big effect on inflation across the whole continent.
