Podcast Summary
Disruptions in Red Sea Affect Global Trade: Small military groups can create significant disruptions in global trade, adding miles and delays to shipping routes, with complex political considerations complicating potential solutions
The disruption in the Red Sea, caused by attacks on vital maritime chokepoints, is having a significant impact on global trade. The Suez Canal, which handles around 12-15% of global trade, has seen dozens of attacks, affecting not just container ships but also liquefied natural gas, liquefied petroleum gas, tankers, and bulk vessels. These disruptions add miles to shipping routes and cause massive delays. The attacks started small but have escalated, and the situation is complicated by political considerations. The US, as the biggest military power in the world, is facing questions about involvement. Other governments, notably in Europe, are also making noise about the issue. This disruption highlights the power of small military groups to create big disruptions and the lack of an obvious solution from major powers. The attacks have affected various types of ships and added significant miles and delays to shipping routes. The situation is complex, with political considerations adding to the challenge.
Houthis Disrupt Global Trade with Expanded Attacks on Ships: The Houthis' escalating attacks on ships have caused war risk insurance to increase, making the Red Sea route economically unfeasible for some, forcing them to take the longer, more expensive route around Africa.
The Houthis, a small player in Yemen's civil war, have significantly disrupted global trade by expanding their attacks to include LNG and bulk vessels, and targeting ships with connections to Israel. Their strategy has evolved from focusing on Israeli-owned ships to attacking vessels with any connection, raising war risk insurance and making it economically unfeasible for expensive vessels to sail through the area. War risk insurance is assessed by a committee in London and is paid for on a per-voyage basis. The cost of this insurance has increased as the Houthis have escalated their attacks, leading some vessels to opt for the longer, more expensive route around Africa instead. Ultimately, the decision on which route to take rests with the shipping company or captain, considering factors such as the value of the ship and cargo, fuel costs, and safety concerns.
Navigating the Red Sea: Weighing Risks and Rewards: Companies weigh various factors, including cargo value, insurance assessments, and military protection, to decide whether to navigate the risky Red Sea or opt for a longer, more expensive route.
The decision to navigate through the Red Sea, despite the risks and high insurance premiums, ultimately depends on various factors including the value of cargo, the assessment of risk by insurance companies, and the protection provided by military escorts. The Suez Canal has seen a significant reduction in the number and tonnage of ships passing through due to escalating attacks, with large vessels opting for longer, more expensive routes instead. The militaries, such as the US and French Navies, have adopted strategies like using sophisticated destroyers to act as "fence posts," intercepting missiles and providing protection for ships in the area. However, the military component is not without challenges, as the missions are not glamorous and can be costly. The decision-making process is complex, with the company being the primary decision maker, consulting with insurance companies and considering the potential economic benefits and military protection.
Heightened security risks for ships in Red Sea and Bab el-Mandeb Strait: The ongoing conflict in Yemen has made the Red Sea and Bab el-Mandeb Strait a dangerous area for ships, leading to increased security measures including navies providing escorts and private security detachments being hired.
The ongoing conflict in Yemen has significantly increased security risks for ships passing through the Red Sea and the Bab el-Mandeb Strait. The Houthis have been targeting vessels in the area, making it a "shooting gallery" for ships. Navies, including the US, British, French, Italian, and Indian, have been providing escorts and security detachments to protect ships from small boat threats and drone attacks. The Suez Canal, historically known for being routine, is now a more dangerous and exciting journey due to the escalating tensions in the region. Private security detachments are being taken on board ships to provide additional security, and crews are riding them for 2-3 months at a time. The situation is expected to continue as the Houthis continue their attacks on vessels.
Disruptions to International Shipping in the Red Sea: The Red Sea conflict between Yemen's Houthi rebels and the Saudi-led coalition is causing significant disruptions to international shipping, leading to increased costs, communication issues, and unpreparedness among navies, including the US Navy, and uncertainty for companies.
The ongoing conflict in the Red Sea between Yemen's Houthi rebels and the Saudi-led coalition is causing significant disruptions to international shipping, particularly in the Bab el-Mandeb Strait. Communication issues between the US Navy and ships in the area have led to misunderstandings and misdirected calls. The lack of priority given to this issue within the US Navy and other navies has resulted in unpreparedness and inadequate resources. Crews on US ships, in particular, have faced challenges due to multiple unions and varying agreements. These issues have led to increased shipping rates and unexpected costs for companies. The wartime insurance rate has risen quickly, and captains are seeking additional compensation for taking on the increased risk. While most shipping is on long-term contracts, surcharges for fuel and port stays can significantly increase costs for companies. The ongoing conflict and resulting disruptions to shipping are expected to persist, leading to continued uncertainty and potential for increased costs.
Global supply chain disruptions and the Navy's role in securing shipping: Global supply chain disruptions have led to increased freight rates and unexpected costs for businesses. The US Navy's historic role in securing shipping and defending commercial interests remains crucial in maintaining global security and ensuring the free flow of goods and resources.
The ongoing global supply chain disruptions, including the Suez Canal blockage and the congestion at major ports like Los Angeles and Long Beach, have led to significant increases in freight rates and unexpected costs for businesses. These issues are affecting international trade routes, with some ships rerouting through the Mediterranean and Suez Canal instead of the Panama Canal due to low water levels and other challenges. The history of the US Navy shows that securing shipping and defending commercial interests have been key roles since its founding over 230 years ago, when it was created to address piracy and protect American ships from being held hostage. Today, the Navy continues to play a crucial role in maintaining global security and ensuring the free flow of goods and resources.
Evolution of Oceans from US flag shipping protection to international commerce: The evolution of oceans from US flag shipping protection to international commerce led to lower shipping costs and free movement of goods. However, recent threats to ocean commerce could result in a shift towards regional shipping and a potential breakdown of the international blue water.
The world's oceans have evolved from being a medium for US flag shipping protection to a vast open market for international commerce. Post World War 2, the birth of open registries led to lower shipping costs due to fewer overheads and taxes. However, the recent threat from the Houthi to ocean commerce has led to a potential shift in the maritime landscape. The concern is not just about the protection of ships but the breakdown of the international blue water where goods can move freely. This could lead to a reordering of shipping, with a move towards regional shipping as people prefer to ship local distances rather than long distances. The increased velocity of world trade since the Somali piracy era magnifies the degree of disruption caused by such threats. It is crucial to ensure the protection of international commerce to maintain the smooth flow of global trade.
Red Sea Conflict Threatens International Trade: The Red Sea conflict, driven by ideological Houthi rebels, poses a significant threat to international trade through the Suez Canal, with potential implications for major players like India and the US.
The ongoing conflict in the Red Sea, caused by the Houthi rebels in Yemen, poses a significant threat to international trade through the Suez Canal. This conflict is different from the Somali piracy of the past as the Houthi's motivations are ideological, and they have the capability to disrupt trade on a larger scale. The Indian Navy, as a major player in the region, has already taken action to protect its crews and interests. China, another major beneficiary of the trade, has a military presence in the area but has yet to intervene in any significant way. The US Navy, historically responsible for protecting trade, has been reluctant to engage due to the complexities of the conflict and the potential for unilateral action. The impact on India, with its significant trade to Europe, could be massive if the situation escalates. It's crucial to recognize the potential implications of this conflict for the US, even if it may not seem directly related, as disruptions to trade can have far-reaching consequences.
Naval Conflict in the Red Sea: Beyond Military Might: Political resolutions and diplomatic efforts are crucial for resolving naval conflicts in the Red Sea. Insurance companies and governments could work together to underwrite war risk insurance to alleviate financial burden on shipping companies.
The ongoing conflict in the Red Sea between the Houthi militia and various naval forces, including the US Navy, is a complex issue with deep political and ideological roots that goes beyond military might. The delay in a unified response from global navies, including the US, is due in part to the underlying tensions in the Middle East and the lack of a clear political resolution. The slow reaction from other allies and the high cost of war risk insurance for shipping companies are exacerbating the situation. The history of naval conflicts shows that political resolutions, not just displays of force, have been more effective in resolving crises. To truly address the issue, there needs to be a focus on diplomatic efforts to de-escalate tensions in the region and find a lasting peace. Additionally, insurance companies and governments could work together to underwrite war risk insurance for ships of all registries to help alleviate the financial burden on shipping companies and keep global supply chains moving.
Global supply chain disruptions causing delays and increased costs due to container backlog: Companies that diversified shipping routes and methods have mitigated supply chain disruptions, while those who did not are experiencing significant delays and increased costs due to container backlog and production shutdowns.
The ongoing global supply chain disruptions are causing significant delays and increased transportation costs due to the backlog of empty containers in Asia. The Suez Canal blockage and production shutdowns in some manufacturing industries are exacerbating the issue. Companies that diversified their shipping routes and methods have been able to mitigate some of these challenges, but those who did not are experiencing significant delays and disruptions. Empty containers, while not a glamorous topic, are a critical component of international trade and have been a significant issue since the beginning of the pandemic. For those interested in learning more about the history of the Navy and its relationship to trade, Ian Toll's "Six Frigates" is a highly recommended book. It covers the early period of the US Navy and the importance of commerce during times of war. Despite some jokes about the Jones Act causing issues, it is not a significant contributor to the current supply chain disruptions.
Jones Act's Impact on Global Energy Crisis: The Jones Act could increase demand for US tankers in the global energy market due to Europe's shift towards New England diesel, potentially impacting insurance and shipping routes.
The Jones Act, a US maritime law, is likely to play a significant role in the upcoming global energy crisis as Europe tries to secure diesel from New England instead of Asia due to longer shipping times. This could lead to increased demand for Jones Act tankers, which may have insurance implications and potentially impact US shipping routes. The conversation also highlighted the historical significance of political solutions in resolving maritime crises, and the potential for regionalization of shipping in the face of small military challenges to global trade expectations since World War 2.
Military forces disrupting global trade: Small military forces' ability to use advanced weaponry and drones could lead to a more fragmented global economy, potentially driving deglobalization
The ease with which small military forces can disrupt global trade through advances in weaponry and drones could be a driving force for deglobalization. The speakers on the Odd Thoughts podcast discussed the potential implications of this trend, suggesting that it could lead to a more fragmented global economy. They encouraged listeners to join the Odd Lots Discord community for further conversation on this topic and other episodes. Additionally, they announced a new podcast called Money Stuff, where Matt Levine and Katie Greifelt will discuss finance and Wall Street news every Friday.
