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Attacks on Red Sea Shipping Pose Threat to Global Trade and Oil Prices

The disruption has led the United States to initiate an international naval operation aimed at safeguarding ships in the Red Sea route.

The recent escalation of attacks on commercial ships in the Red Sea by Houthi rebels in Yemen is causing concerns among analysts who warn of potential impacts on global trade and oil prices. Several shipping companies have temporarily halted shipments through the Red Sea route, prompting the world’s second-largest shipping line, Maersk, to reroute some vessels around Africa’s Cape of Good Hope.

The disruption has led the United States to initiate an international naval operation aimed at safeguarding ships in the Red Sea route. Countries including the UK, Canada, France, Bahrain, Norway, and Spain are joining the security efforts to counter the escalating threat.

The Red Sea is a crucial route for transporting oil, liquefied natural gas, and consumer goods, linking the Bab al-Mandab Strait in the south to the Suez Canal in the north. The attacks have led major oil companies, such as BP, to temporarily suspend crude shipments through the strategic trade route. Rerouting ships around the Cape of Good Hope adds considerable distance and time to the journey.

Although oil prices experienced a 1% rise on Monday, they remained relatively stable on Tuesday, with benchmark Brent crude trading at around $78 a barrel. However, analysts express concerns that continued rerouting of tankers could have broader implications for the global supply chain.

Richard Meade, editor-in-chief of shipping newspaper Lloyd’s List, emphasised the potential seriousness of the situation, stating that the market is finely balanced, and continued rerouting could impact the global supply chain significantly.

Rerouting not only affects the oil industry but also has broader implications for global trade. Approximately 12% of global trade, valued at about $1 trillion worth of goods annually, passes through the Red Sea. Major container carriers, responsible for transporting finished goods, have already begun rerouting, leading to potential disruptions in the supply chain.

Marco Forgiona, Director General at the Institute of Export and International Trade, highlighted the additional costs associated with rerouting, including increased fuel and insurance expenses, potential congestion at ports, and further delays.

With nearly 15% of goods imported into Europe, the Middle East, and North Africa shipped from Asia and the Gulf via sea routes, the situation poses significant risks to international trade and the global economy. Rising oil prices, resulting from disruptions in the Red Sea route, could contribute to higher inflation, impacting economies already grappling with economic challenges. The ongoing situation emphasises the need for a comprehensive international response to secure this vital trade route.

Kiki Garba

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