The podcast discusses two indicators of the economic disruptions caused by the war in Gaza - the impact on global shipping routes through the Red Sea and the potential escalation effects on the region's oil exports. It explores the role of Houthi rebels in attacking container ships, the re-routing of shipping lines, and the ripple effects on delivery time and cost. Additionally, it examines the correlation between the conflict escalation and rising oil prices, as well as the implications for other industries, like food.
The attacks by Houthi rebels in the Red Sea have increased war risk insurance costs for shipping companies, resulting in extra fees and delays in the global supply chain.
The escalation of conflict in the Middle East poses risks of higher oil prices and increased food prices, potentially leading to food insecurity, sickness, and political instability worldwide.
Deep dives
Ripple Effects of Conflict: Red Sea and Suez Canal
The conflict in the Middle East, particularly between Israel and Gaza, has led to various economic ripple effects in the Red Sea and the Suez Canal. The attacks by Houthi rebels in the Red Sea, including hijacking vessels and attacking commercial ships, have increased war risk insurance costs for shipping companies. As a result, shipping companies have started charging extra fees or rerouting their vessels, which adds significant costs and delays to the supply chain. These higher costs may potentially lead to increased oil prices and more expensive consumer goods.
Impact on Global Economy: Oil Prices and Food Insecurity
The escalation of conflict in the Middle East, especially in the second phase involving multiple countries and non-state actors, poses economic risks to the global economy. One major concern is the potential disruption of oil and gas trading volumes, as the Middle East is a significant producer. If the conflict continues to escalate, it could strangle the output of oil and gas from the Gulf states, leading to higher oil prices and impacting food prices worldwide. Rising food prices can contribute to food insecurity, sickness, starvation, and political instability, particularly in developing countries.
Wider Escalation and Global Impact
As the conflict in the Middle East and disruptions in the Red Sea and Suez Canal continue, there are additional risks and potential domino effects. A major concern is the viability of the Strait of Hormuz, a key shipping route for one-fifth of the world's oil. If the conflict escalates further, there may be a shipping blockade in the Strait, potentially led by Iran. This could impact other oil producers and result in higher oil prices, triggering global economic shocks, such as increased inflation, reduced global growth, and recession. The potential chain of events highlights the interconnectedness of global shipping routes and the vulnerability of the global economy to regional conflicts.
On today's show, we look at two indicators of the economic disruptions of the war in Gaza and try to trace how far they will reach.
We start in the Red Sea, a crucial link in the global supply chain connecting to the Suez Canal, with around 15% of the world's shipping passing through it. This includes oil tankers and massive container ships transporting everything from microchips to furniture. With Houthi rebels attacking container ships in solidarity with Palestinians in Gaza, shipping lines are re-routing, adding time and cost to delivery. We look at how ocean shipping is a web more than a chain of links, and try to see which parts of the web can take up more strain as the Red Sea and the Suez Canal become too dangerous to pass.
Then, we'll consider what escalation could mean for the region's most important export: oil. Five steps of escalation each mean a ratcheting up of costs that knock on to other industries, like food. Some prices are likely to rise faster than others, though.