Red Sea, Mid-East troubles raise specter of high energy prices
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Ongoing geopolitical risks from the Red Sea conflict may cause a surge in energy prices, even as prices remain stable for the moment.
Driving the news: Fallout from the Israel-Hamas war, and worsening U.S.-Iran tensions, are endangering the stability of the global supply chain. In its 2024 outlook released earlier this month, the World Bank warned that "inflationary bottlenecks" were a real possibility.
- Amid "a setting of escalating conflicts, energy supplies could also be substantially disrupted, leading to a spike in energy prices," the bank added.
Why it matters: International tensions and supply chain imbalances have become major impediments to global trade since the pandemic.
- China, the world's biggest exporter, has intervened to de-escalate the Red Sea situation — and crude has remained remarkably stable in the face of mounting instability. But an escalation may put upward pressure on energy prices.
- The conflict comes at a time when more than a third of the Panama Canal has been struck by drought.
Catch-up quick: After recent attacks, shipping companies face increased costs and a one-week delay in delivery times. To compensate, they have shifted from the traditional Red Sea/Suez Canal route to the longer journey around the Cape of Good Hope.
- World Bank economists caution these delays may lead to inflationary bottlenecks, compounded by climate-related problems in the Panama Canal.
- Production cuts from OPEC+ and higher-than-anticipated demand pose additional upward price risks, according to the report.
- In early January this year, U.S. officials, said that the direct economic impacts on the U.S. were relatively limited.
Yes, but: Minor disruptions can contribute to the escalation of already volatile energy prices, which eventually impact fuel and food prices.
- But an increasingly unstable geopolitical outlook hasn't given a lasting boost to crude prices. After an attack in Jordan killed three U.S. service members over the weekend, crude briefly spiked, then fell by over a percent on Monday to settle below $83.
- A spluttering Chinese economy is contributing to demand fears that have kept prices subdued, while ample oil supplies are keeping markets fed, Axios' Matt Phillips reported recently.
By the numbers: About 15 percent of global seaborne trade goes through the Red Sea. This includes 8 percent of global grain trade, 12 percent of traded oil by sea, and 8 percent of the world's liquefied natural gas trade.
- The insurance costs are now adding $1 million each way for shippers who are forced to take the only alternative route.
Bottom line: In addition to energy, supply disruptions could spill over to other commodity prices, potentially dampening investment and weakening global growth.
- "An escalation of the conflict in the Middle East could exacerbate food insecurity across low-income countries as many of them are highly dependent on food and energy imports," the World Bank notes.
