Tensions in the Red Sea have escalated as the United States and the United Kingdom led bombings against multiple sites controlled by the Houthi armed group on Thursday night. The Houthi rebels have been carrying out attacks on commercial vessels passing through the Bab-el-Mandeb strait, demanding that Israel end its war on Gaza and allow humanitarian aid. In response, a US-led coalition has positioned military platforms in the Red Sea to deter the Houthis and protect shipping routes. However, the Houthis remain committed to their cause, causing disruptions to global supply chains and impacting Israel’s economy.
The Red Sea is a vital trade route, connecting Asia to Europe and the Mediterranean via the Suez Canal. Currently, around 12 percent of the world’s shipping passes through the Red Sea, with an estimated value of over one trillion dollars per year. However, the Houthi attacks have led to a decrease of over 40 percent in traffic through the Red Sea, forcing shipping operators to redirect their vessels around the Cape of Good Hope, adding significant delays and costs to their routes.
While container shipping has been the hardest hit, oil tankers have been minimally affected. Data shows that the passage of oil tankers through the Red Sea has remained relatively stable. However, the attacks have had a significant impact on Israel’s economy, particularly on its only Red Sea Port in Eilat. The port has reported an 85 percent drop in activity since the attacks began. Although most of Israel’s marine traffic comes through Mediterranean ports, exports of Dead Sea potash and imports of Chinese manufactured cars, which make up a significant portion of Israel’s electric vehicle sales, rely on Eilat.
The Houthi attacks have also raised concerns for Israel’s ambitions to become an exporter of Liquid Natural Gas (LNG). Prior to the attacks, Israel was on track to become a reliable gas exporter, but the hostilities have increased political risks and jeopardized Israel’s role in the global natural gas market. The longer the disruptions continue, the greater the repercussions may be for Israel’s economy.
The impact of the Houthi attacks on global trade and shipping costs cannot be ignored. Shipping disruptions and increased congestion at ports have led to delays and additional expenses for shipping companies. The cost of transporting a 40-foot container from China to Europe is expected to increase by 248 percent since the attacks began. These disruptions can have implications for the “Just In Time” manufacturing processes in developed economies, where interruptions in shipping schedules can lead to significant complications.
While the Houthi attacks have not yet resulted in global inflation, economists suggest that increased transport costs could potentially lead to inflation in the future. The International Monetary Fund has estimated that previous disruptions in shipping routes during the pandemic led to a 1 percent increase in global inflation.
In conclusion, the Houthi rebel attacks in the Red Sea have created significant disruptions to global trade, impacting Israel’s economy and posing risks for its ambitions as a gas exporter. The decrease in traffic through the Red Sea, redirection of vessels, increased costs, and potential inflationary pressures highlight the importance of resolving the conflict and ensuring the stability of shipping routes in the region.
