Tension in the Red Sea threatens global trade and is bound to damage the Egyptian economy. The Suez Canal is being attacked by the Houthis by default with every attack they make on international shipping in the Red Sea, which is forcing shipping companies to suspend their use of the major maritime route.
The Houthi attacks in the Bab Al-Mandeb Strait against merchant ships owned or operated by Israeli companies, or going to or from the occupation state, are in response to the ongoing Israeli genocide against the Palestinians in the Gaza Strip.
With the beginning of President Abdel Fattah Al-Sisi’s third term in office, Egypt looks set to receive a painful blow to its already exhausted economy, which is unable to obtain enough foreign currency to meet its financial needs, especially US dollars. It is expected that the disruption in the Red Sea will continue for several months.
The reality is that current events not only threaten Red Sea-Suez Canal trade, but also global trade in general. Oil and gas prices are rising, as are shipping and insurance costs, all of which are predicted to raise prices around the world by up to 15 per cent.
The alternative route round Africa via the Cape of Good Hope takes about 14 days longer than the route from the Gulf and Far East to Europe through the Suez Canal. Nearly 12 per cent of global trade passes through the canal, with about 30 per cent of the world’s shipping containers, 10 per cent of the oil trade, and eight per cent of natural gas, according to Bloomberg.
With 19,000 ships sailing through the Suez Canal annually, it is one of the busiest maritime routes in the world.
Compounding the effect on world trade, the Panama Canal in Central America is facing a fall in traffic due to drought lowering the water level in the canal.
According to the Kuehne and Nagel transport and logistics company based in Switzerland, 103 vessels so far have changed course to use the Cape of Good Hope route. However, the US shipping company Flex Port, estimates that 180 vessels have changed course away from the Bab Al-Mandeb Strait, or have been instructed not to sail and to wait for instructions from the owners.
A.P. Moller-Maersk, the second largest container ship operator in the world, confirms that the current tension has affected 15 container routes between Asia and Europe, as well as the route from the US east coast to the Middle East. Some of the most prominent companies that are no longer using the Red Sea route are Hapak Lloyd, Maersk, MSC, CH Robinson, CMA-CGM, Frontline, Gram Carriers, Evergreen, HMM, Ocean Network Express, Orient Overseas Container Line, Linnaeus Wilhelmsen and British Petroleum BP. Companies which have diverted their vessels from the Red Sea control about half of the world’s container shipping market, reported Reuters.
The Houthis launched more than a hundred attacks on merchant ships in the Red Sea in November, using missiles and drones, amid threats by the Iranian Revolutionary Guard Corps to close the Strait of Gibraltar and other key waterways.
Another threat to Egypt’s revenue from the Suez Canal, which is of strategic and economic importance, is Israel’s announcement that it has had a successful trial of a new land route using trucks from the port of Dubai to Haifa. The route passes through Saudi Arabia and Jordan and is being tested as an alternative to the Egyptian waterway.
Israeli media say that the land bridge will be a safe alternative to using the Suez Canal, but experts confirm that it is more expensive than the maritime route. Nevertheless, if the threats continue in the Red Sea, air or land transportation will be the safest option despite the higher costs, which will have a negative impact on the Suez Canal, which provided $9.4 billion to Egypt in 2022/23. Representing around 10 per cent of Egypt’s annual budget, according to official data, the canal is the fourth largest source of foreign currency in the country after exports, remittances from workers abroad and tourism.
Preliminary estimates suggest that extending Israel’s war beyond three months would cause Egypt, Lebanon and Jordan losses in gross domestic product amounting to $18bn, the UN Development Programme and the Economic and Social Commission for Western Asia (ESCWA) have pointed out. The tourism sector in the three countries is expected to incur losses worth $16bn.
The current situation is also causing an increase in oil prices, which has a negative impact on Egypt’s general budget. Cairo has set the average price of a barrel at $80, while the real price is heading to about $83 per barrel. A one dollar increase in the price of a barrel would lead to a change in the oil allocations in the state budget of up to four billion Egyptian pounds ($130 million).
About 9.2 million barrels of oil per day came through the Suez Canal in the first half of 2023, or about nine per cent of global demand, according to the US Energy Information Administration.
One Egyptian expert who requested anonymity said that the prolonged war in Gaza and the continued Houthi attacks on vessels in the Red Sea, complicate the situation for Egypt, pushes the canal revenue into significant decline, and will increase the suffering of the Egyptian economy around the turn of the new year. What is more dangerous for the people of Egypt is that the Sisi regime is exploiting what is happening and using it as an excuse for the failure of its economic policies.
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Meanwhile, there are fears that the launch of Operation Prosperity Guardian by the US-led coalition to protect international shipping in the Red Sea threatens to erupt into a military confrontation with the Houthis lasting months. This effectively means militarising the Red Sea and pushing shipping companies to search for new routes for their ships. These developments may give life to the alternative Israeli landline. The security operation includes naval vessels from ten countries: the US, the UK, France, Italy, the Netherlands, Norway, Spain, Canada, Bahrain and Seychelles.
A more complicated development, which may add to Egypt’s suffering, is the threat by the Islamic Resistance in Iraq to target an Israeli gas field platform in the Mediterranean Sea, which opens the door to other attacks on Israeli oil and gas production sites. This expands the scope of the war and increases the security threats in both the Red Sea and Mediterranean, complicating maritime traffic even further.
Egypt’s options thus appear limited and high-risk. It could take part in Operation Prosperity Guardian to secure navigation in the Red Sea. This would increase the military burden on its depleted economy, and may embroil Egypt in a military confrontation with the Houthis. It could also use alternative routes, including a land and sea link between the Jordanian port of Aqaba and the Egyptian port of Nuweiba, then transporting goods by land to the Mediterranean ports of Alexandria, Port Said and Damietta.
In general, Egypt remains in a dilemma if the Gaza war continues, the Houthi threats in the Red Sea also continue, and the possibility of militarising the region through Operation Prosperity Guardian increases. Most dangerous of all, as far as Egypt and the future of the Suez Canal are concerned, is that we could see the revival of projects for alternatives to the Suez Canal proposed by Russia, India, China, Israel, the UAE and other countries.
The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.