By Sameeran Galagali
Published on November 27, 2024
It has been more than a year since the war between Israel and Hamas erupted on October 7, 2023. As the conflict escalated, it became a wider crisis involving various regional and extra regional, and State as well as non-State actors. The stability and security of the region has caught the eye of the world because of various reasons, one of them being the impact of the crisis on the global economy.
Why is West Asia Crucial?
Geography lies at the heart of West Asia’s significance as a region. The region houses oil-rich countries, which satisfy the energy demands of most of the countries in Asia, and also in Europe ever since the Russo-Ukraine war broke out. Some of the world's largest oil importers, like China and India source much of its oil demands from the region. Any turbulence in the region lead to daunting questions of energy security in many parts of the world.
In addition, the region is also home to one of the busiest maritime routes of the world that connects Europe to Asia. Maritime traffic in the form of cargo vessels, merchant vessels as well as navy ships of major stakeholders use the Red Sea region for transit. Red Sea passage has two entry points: The Bab-al-Mandab strait and the Suez Canal. They act as entry points to Asia for European shipments. According to the US Energy Information Administration, an annual average of 8.8 million barrels of oil shipments pass through the Bab al-Mandab strait each day, representing 8.7% of the global demand of 101.7 million barrels per day in December 2023. Apart from the Red Sea, West Asia also houses the crucial Strait of Hormuz that connects the Gulf countries to Asia, since it connects the Persian Gulf and Gulf of Oman to the Arabian Sea. The Strait of Hormuz is the world's most important oil chokepoint because large volumes of oil flow through this strait. Therefore, disturbances in the region lead to delays in delivery, delays in production, disruption in supply chains, and thus leading to slowing down of economies.
West Asian Crisis and Global Supply Chains
Close to 15 percent of international shipping traffic, amounting to US$ 1 trillion per year, 33 percent of global container traffic amounting to 1,500 commercial vessels monthly, 10 percent of global oil supply (8.8 million barrels per day) and 8 percent of global gas supply transits through the Red Sea. The Houthis of Yemen, which are a big player in the Axis of Resistance have bombed/hijacked more than 40 ships in the Red Sea region between October 2023 to March 2024. As a response to these attacks, the U.S. has brought in a new Operation Prosperity Guardian (OPG) in order to counter any terrorist/militant interference in the region. These activities in the region has lowered the transit of ships in the Red Sea region from almost 50 ships a day in November 2023 to 8 ships a day in February 2024. Most of these ships were switched from the Red Sea to the Cape of Good Hope route.
These disruptions came at a time when international trade was recovering from the COVID trauma, and global manufacturing had seen a 12% rise in the financial year 2022-23. Therefore, these changes have added to both, short-term price hikes of goods such as steel, and also inflationary trends due to price-hike of commodities like oil and natural gas. The change in route to the longer Cape of Good Hope has led to great losses for the export-import of just-in-time and perishable commodities. Moreover, MNCs such as Tesla, Gechem, Volkswagen amongst others are either temporarily halting their productions or shutting down their assembly lines due to supply chain disturbances. These MNCs procure chemicals, critical minerals, microchips from Asian markets which hitherto traversed the Red Sea. For instance, Germany's chemicals sector, the country's third-biggest industry after cars and engineering with annual sales of around 260 billion euros ($282 billion), relying on Asia for around a third of its imports from outside Europe is seen suffering the strain of Red Sea supply crisis.
Not only Europe, but the regional economies are also seen to be bearing the brunt of the war. For instance, Egypt has been suffering losses in revenue from the Suez Canal because of the rerouting pattern. Egypt has incurred more than $6 billion revenue loss from the Suez Canal from November 2023 to July 2024. Apart from the economic blows, Egypt also faces the geopolitical challenge of balancing its position in the war as an important regional participant. Egypt is one of the few countries in the West Asia-North Africa (WANA) region to have “normalised” relations with Israel.
Given the ongoing turbulences in the maritime transit and traffic routes, rerouting to the Suez Canal will be a difficult task in the near future for the private shipping companies, due to the constant threat of being attacked.
What Lies Next?
The conclusion of the war is very unpredictable, given its entanglements and the varied interests of different parties involved. The war still continues to expand in both geographical extent and also in scope of its targets; the Israel-Hamas war now includes regional powers like Iran, several other non-state forces and the involvement of extra-regional powers like the US. The targets include the naval and merchant/cargo vessels alike. This expansion of the war has made the region even more fragile, with fruitful negotiation between parties still not in sight.
Given the fragility of the global economy, the warring parties need to dilute their policies towards private and commercial shipments. The OPG assured a safe and secure trading space for all, but it opens an important question: does the world now need a military operation in order to carry out trading activities? How feasible is this pattern of trade in the long-run?
How can relatively stable global supply chains be ensured in the midst of such a regional crisis? The answer to this question can be answered only by time. However, in this context, Track 2 diplomatic dialogues, including entities such as chambers of commerce, oil corporations, and similar entities working for the collective commercial growth of the region could come together to chalk a way out that would at least allow countries to trade freely through waters, and prevent the world from another economic shock. If the war continues to advance in the same fashion, supply chains will further get disrupted and delayed, leading to economic losses on the part of all trading nations.
*The Author is a Research Intern at the Kalinga Institute of Indo-Pacific Studies (KIIPS), India. He also has an Undergraduate Degree in Political Science from Sir Parshurambhau College (Autonomous), Pune.
Disclaimer: The views in the Article are of the Author
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