The cost of global shipping is going up, in large part because of a new crisis in the Middle East: attacks on cargo ships. Container ships passing through the Red Sea are getting shot at by rockets and drones from the Houthis, a rebel group in the nation of Yemen. Approximately 12% of global trade goes through the Red Sea and the Suez Canal, and now they’re under attack.
The U.S. Navy and British allies have responded by bombing the Houthis’ positions to try to keep the Red Sea safe for cargo ships. But the Houthis seem unlikely to stop. As a result of the Houthi attacks, many cargo ships have stopped sailing through the Red Sea and are taking longer, slower, more expensive ocean routes — such as sailing around the Horn of Africa.
The Red Sea shipping crisis has the potential to bring back the kinds of supply chain snags and higher inflation that dragged down the global economy in 2021-2022. When cargo ships can’t take the fastest route, it drives up the cost of shipping — and this drives up the price of oil, energy, food, car parts, and everything else that travels by ship.
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Let’s see why the shipping crisis in the Red Sea could cause red ink for your personal finances.
Global shipping: Why it matters to your wallet
Ocean freight is a taken-for-granted miracle of the global economy. Every day, thousands of massive ships haul billions of dollars worth of products all over the planet, between China and Europe, between the U.S. and Asia, carrying imports and exports, making international trade possible. The biggest cargo ships can carry thousands of freight containers, each one of which can be hauled by semi truck. Imagine thousands of semi-truck trailers, stacked on top of each other, sailing across the ocean.
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Ocean freight vessels carry everything from cars to T-shirts to smartphones to barrels of oil. These huge cargo ships make it possible for Americans to eat bananas from Central America, drink wine from Spain, buy cars from Japan, watch big screen TVs from China, and enjoy all kinds of other affordable products from all over the world.
Supply chain crisis: Is it 2021 all over again?
Ocean shipping is crucial to the global economy, because it’s so much cheaper than other forms of shipping, like trucks or planes — ocean freight tends to be 12-16 times cheaper than air freight. In fact, 80% of the world’s cargo travels by sea. So if cargo ships cannot pass safely through the Red Sea, this could cause delays, disruptions, and price increases that could hurt your personal finances in 2024.
During 2021 and 2022, there were supply chain issues from several causes:
- Some ports and factories were closed in China during COVID-19 lockdowns.
- Ports in the U.S. were congested with a backlog of ships, causing delays (and extra costs) to unload and reload cargo ships.
- Russia’s war in Ukraine made it harder for grain shipments to leave Ukraine, driving up food prices.
- Many international airlines and freight companies stopped flying through Russian airspace because of the Ukraine war, which drove up these companies’ costs and caused shipping delays.
- In March 2021, the Ever Given, a massive container ship, got stuck in the Suez Canal, blocking the canal and causing six days of delays that backed up global shipping at a cost of $400 million per hour.
As a result of these supply chain shocks, the cost of ocean cargo shipping containers increased by seven times between March 2020 and September 2021. Factories suddenly had parts shortages and supply chain delays. The IMF estimated that 2021 shipping delays drove up inflation in 2022 by 1.5%.
When global ocean shipping isn’t working smoothly, everything in your life gets more expensive. The price of oil could go up, the price of food could go up, and it could become harder for you to get the products you need — everything from infant formula to cars has been impacted by supply chain disruptions in recent years.
In October 2021, supply chain issues forced me to wait almost eight months to get a new car after my car got totaled. Supply chain problems have also contributed to the rising costs of car insurance, as cars got more expensive and parts shortages made car repairs more costly. The cost of shipping is baked into the global economy, and when that background cost goes up, we all have to pay a price.
What might solve the Red Sea shipping crisis
Could the Red Sea Houthi shipping crisis take us back to the bad times of 2021? A report from CNBC said that if 40%-50% of all cargo ships are no longer able to use the Suez Canal and Red Sea, this could cause supply chain issues for retailers like we experienced during the COVID-19 pandemic.
However, the good news is that the global shipping industry has some extra capacity — spare ships and containers that are not currently in use. Another CNBC report quoted Alan Murphy, CEO of Sea-Intelligence, who said that approximately 10% of the world’s cargo ships are available for work. If cargo shipping companies can put more ships and containers into service, this could counteract the Red Sea crisis and avoid big price spikes for everyone.
Bottom line: If you’ve been breathing a sigh of relief from falling inflation, beware of the Red Sea shipping crisis. If the cost of ocean freight goes up, the cost of living will go up too. The global economy is interconnected, supply chains can be fragile, and a big problem in one part of the world can cause higher prices and financial pain all over the planet.
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