From: allin
The Houthi movement has been attacking commercial ships in the Red Sea with drones and missiles, an issue largely underreported in mainstream media [00:08:01]. These attacks are stated to be in revenge for Israel’s military campaign in Gaza [00:08:15]. The Houthis claim they will cease attacks only when Israel allows food and medicine to freely enter Gaza [00:08:21].
Impact on Global Trade
The attacks have interrupted one of the world’s busiest trade routes [00:08:48]. All five of the world’s largest shipping conglomerates have paused transfers through the Red Sea [00:08:53]. This forces ships to reroute around Cape Horn and South Africa to get goods from Asia to Europe, adding thousands of extra miles [00:08:58]. This situation has already caused oil and gas prices to rise [00:09:09], and if it becomes acute, it could significantly impact the global economy [00:09:12].
Ryan Peterson, founder of Flexport, highlighted the “massive” impact [00:11:01]:
- About 30% of all ocean container traffic flows through the Suez Canal and the Red Sea [00:11:03].
- Most of this traffic is Asia to Europe [00:11:11].
- Rerouting around the southern tip of Africa adds about 20% to 25% longer journey time [00:11:19], which means less capacity in a network business [00:11:29]. This translates to a 20-25% cut in shipping capacity for the 30% of affected containers [00:11:33].
- Approximately 12% of global oil and 8% of liquefied natural gas pass through this area [00:11:39]. The narrow strait is known as the Bab-el-Mandeb Strait, leading into the Red Sea and then through the Suez Canal into the Mediterranean [00:11:47]. This has historically been a critical maritime choke point [00:12:03].
- Houthi attacks spike insurance costs and endanger crew lives [00:12:42]. Ships cannot operate without insurance [00:12:57].
- Ocean freight prices from Asia to Europe have already seen a 3x increase for January, compared to very cheap rates a month or two prior [00:13:34].
- The impact is greater on Europe than on America, as the Asia-to-East Coast US route is only 8% longer, compared to 20% for Europe [00:18:50]. The Panama Canal’s current congestion (at about two-thirds capacity) [00:18:40] exacerbates this.
- China has an interest in keeping the route flowing to ship goods quickly to Europe [00:19:06].
- Saudi Arabia’s biggest port, Jeddah, is also blockaded [00:19:23], which Saudi Arabia is unlikely to tolerate [00:19:28].
- Shipping freight is generally inelastic; companies will pay more for transport unless margins are extremely thin [00:17:58].
- Supply chains are not more resilient post-COVID at the physical infrastructure layer [00:30:48], as bottlenecks simply disappeared with decreased demand [00:30:52].
- Air freight is still four to five times more expensive than sea freight [00:31:52], and its networks are very small in proportion to container ships [00:32:03]. A single large container ship holds the equivalent of 10,000 40-foot containers, while a 747 can hold 7 [00:32:06]. A diversion of even a small amount of ocean freight could rapidly impact air freight prices [00:32:21].
Houthi Group Background and Motives
The Houthis are a Shia group in Yemen that rose in 2014, deposing the monarch and controlling large swaths of the country [00:14:14]. While often sponsored by Iran, they also have their own agency [00:14:33]. They state their actions are in solidarity with the Palestinians [00:14:44]. Initially, they fired rockets at Israel, but these did not reach their target [00:14:50]. They then shifted to firing on and mining ships in the strait [00:14:56]. Although they claim to only target ships transacting with Israel, this is not true; many Western ships without Israeli ties have been targeted [00:15:14].
US Response and Geopolitical Ramifications
The US has announced “Operation Prosperity Guardian” to restore trade flow through the Red Sea [00:15:28]. However, this may involve military action against the Houthis [00:15:41].
- The Houthis have already survived almost a decade of Western-sponsored attacks during their war with Saudi Arabia (2015-2022) [00:15:56], which caused a massive humanitarian crisis [00:23:43]. It is unclear what actions would effectively stop them [00:16:11].
- An expansion of the conflict into Yemen would mean another front in the Middle East conflict directly involving the US [00:16:23].
- There have been nearly 80 attacks on US bases in Syria and Iraq by Iranian-sponsored Shia militias in recent months [00:16:34], highlighting the region as a “powder keg” [00:16:47].
- If the Red Sea blockade continues through 2024, it could cause significant upward pressure on global prices and inflation, potentially impacting market expectations for rate cuts [00:17:15].
- Saudi Arabia is reluctant to restart its war with the Houthis or hostile relations with Iran, which is why it is not participating in Operation Prosperity Guardian [00:24:12].
Outlook and Potential Resolutions
The situation’s resolution is complicated:
- The Houthis will not stop until Israel’s war in Gaza stops [00:24:30].
- Israeli Prime Minister Netanyahu has stated Israel will not agree to another ceasefire until Hamas is eliminated [00:24:35]. The Israeli public largely supports continuing the war until Hamas is eliminated [00:29:06].
- A ceasefire in Gaza would likely end the Houthi situation quickly [00:24:46].
- There is a risk of this Israel-Hamas conflict spiraling into a larger regional war that pulls in the US [00:25:28]. The Houthis have even threatened to light Saudi oil fields on fire if the US attacks Yemen [00:25:42].
[!NOTE|Asymmetric Warfare] The Houthi attacks highlight the challenge of asymmetric warfare: launching a cheap drone (thousands of dollars) that costs millions to shoot down with a missile [00:33:29]. The low risk tolerance of Western shipping for any loss (due to insurance implications) means a small investment in attacks can shut down tens of millions of dollars in commerce [00:34:01]. This behavior may be emboldened by the perceived praise for Hamas following October 7th [00:34:40], potentially leading to more such activity in other regions [00:34:57].
The desire among Middle Eastern powers like Saudi Arabia, UAE, and Qatar to build diversified economies for the next 30-40 years pushes them towards stability and prosperity [00:21:00]. They do not want to be bookended by two hot wars propagated by Iran [00:21:14]. This alignment of interests among regional powers and global trade stakeholders (US, UK, Canada, France, China) could lead to a concerted effort to “clean the decks” and resolve these conflicts [00:21:49]. This push for modernization and deep ties with the West and East is seen as a force greater than traditional conflict forces [00:37:35].
However, a quick resolution is not guaranteed, as containing conflicts rather than resolving them is often seen as success in the region [00:28:09]. The underlying issue of Israel’s continued military action in Gaza makes a diplomatic solution difficult if the Houthis maintain their stance [00:27:59].