Suez Canal: Why Its Closure Spells Uncertainty For World Trade and Global Oil Prices

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The nihilistic sentiment in the article title is deliberate. Over the past few days, social media has been rife with posts about a Taiwanese cargo ship grounded in the Suez Canal, blocking all trade vessels from either side. The container named Ever Given happens to be one of the largest cargo ships in the world, roughly the size of the Empire State Building.

The Suez Canal is one of the arterial routes for global maritime trade and its blockade, now spanning several days, could be fatal to world trade and oil commerce.

Ever Given cargo ship grounded in the Suez Canal
How did the blockade happen?

The Ever Given is one of the largest container vessels in the world operated by a Japanese-owned, Taiwanese company, Evergreen. On Tuesday, 24th March, the 440m long and 59m wide ship rammed into the eastern bank of the canal and is now badly stuck.

The ship was en route to Rotterdam from China when it was “suspected of being hit by a sudden strong wind, causing the hull to deviate…and accidentally hit the bottom and ran aground”, as explained by Evergreen Marine Corporation. High winds and a sandstorm hit the area on Tuesday, but skepticism is rampant.

Source: Google Earth, AP Reporting

The ship entered the 300 meter-wide canal even when another ship held off due to weather concerns. This observation is based on tracking details and interviews. The Ever Given also didn’t employ tug boats, as reported by Bloomberg News, while two other ships on the same path did. The speed of the vessel is also in question since onlookers revealed that it seemed to speed up before it struck the bank.

History of the Canal

The Suez Canal is a critical manmade sea-level waterway that connects the Mediterranean to the Red Sea. The 193 km long canal is a prominent water route for worldwide shipping. It handles roughly 12% of global trade each day with millions of barrels of oil and natural gas transferred through it. The canal significantly reduced the distance between Europe and Asia. It has served as a shortcut between the continents, enabling ships to avoid the longer and cumbersome trip around Africa.

Constructed between 1859 and 1869, the control of the Suez Canal switched hands between the French and the British. The stalemate ended when Egyptian President Gamal Abdel Nasser nationalized it in 1956. Presently, it is an invaluable income source for Egypt, generating about $5.6 billion dollars in revenue annually. In 2015, part of the canal was expanded to include a 22-mile parallel channel.

Significance of the Suez Canal for Global Supply Chains

A plethora of manufactured products and raw materials rely on the Suez Canal for transportation from one nation to another. These include automobiles made in Asia, semiconductors and smartphones exported from south-east China, footwear and apparel made in India, and lithium-ion batteries made for EVs exported from Japan.This is not an exhaustive list since the actual products are innumerable.

Suez Canal before the logjam

Overall, ships passing through the canal carry goods worth nearly $10 billion every day. So a quick clearance of the impasse is key to restricting the potential economic fallout. On average roughly 50 ships, carrying 1.2 billion tonnes of cargo, traverse the canal in a day. This translates to a delay of about $400 million an hour in goods. Even if the canal is opened, it would take nearly two additional days to clear the backlog.

Imports from Europe may be delayed, and because of the blockage, the return of empty shipping containers to Asia will be affected. This will compound the container shortage crisis fueled by escalating demand for consumer goods during the pandemic. Experts also warn of a surge in insurance and litigation claims for the jammed cargo in the canal.

“All the things, food and medical supplies to fuel all things we take for granted all transit through that canal, on its way to Europe from Asia. So it is a very, very serious disruption.”

Guy Platten, Secretary-General of International Chamber of Shipping
Concerns Linked with Canal Closure

If the canal remains closed, there are virtually no alternatives such as rail or truck transportation to ship goods between Asia and Europe. So, shipping companies are deliberating on diverting vessels around the Horn of Africa or the Cape of Good Hope. Such a step would steeply increase logistic costs, and add seven to nine extra days to a trip.

The Boston Globe reported that suppliers diverted at least seven tankers carrying liquefied natural gas. This included three steered toward the longer route to Europe via the Cape of Good Hope in southern Africa.

A potential risk associated with this secondary route is piracy. Pirates have always targeted ships sailing around the Horn of Africa. But have now also become active in the oil-rich west Africa. In recent months there has also been a surge in kidnapping in the Gulf of Guinea.

Moreover, ships circumnavigating Africa will emit more greenhouse gases into the atmosphere, contributing to increase in global warming.

Impact on Oil Prices

Oil prices rebounded after a short dip following the news of the Canal closure. However, oil trade reliance on the Suez Canal has declined over the years as new means of supply become accesible.

  • Large global stockpiles of oil, stored up as buffer during the coronavirus pandemic can fulfill any scarcity in the short-term.
  • Saudi Arabia, Kuwait, the United Arab Emirates, Qatar and Egypt, jointly own the Sumed pipeline. It is capable of pumping 2.5 million barrels of crude a day from the Red Sea to the Mediterranean across Egypt. While supply across the pipeline dwindled with OPEC+ output cuts, the Suez crisis provides a window of opportunity to grow.
  • Oil shipped from the North Sea to Asian markets relies on tankers that are too big for the Suez Canal. They take the 17,000-mile roundabout route to China via the southern tip of Africa. Therefore, the Suez bottleneck is also unlikely to impact this oil route.
  • There has been a reported decline in oil export to Europe. While this may be attributed to the pandemic, many nations have been on the lookout for alternative trade routes. A rebalancing of global commerce in lieu of China’s increasing dominance has been in the offing.

However, the crisis affects India in particular because of ethane import and export from the US. India is the leading buyer of crude through the Suez route among Asian countries with 500,000 barrels imported per day.

The import of crude from Latin America, the uptake of which was recently increased has also been impacted. The fuel prices in India could further drive up if the freeing of the container ship ‘Ever Given’ takes weeks, as is now being predicted.

Real time visualization of ships along major trade routes
Resolution and Future Impact

The Suez Canal Authority (SCA) said it was working to refloat the giant ship, using rescue and tug units. Eight tugboats are working to free the vessel. The chairman of the SCA, Admiral Osama Rabie, said that an older section of the canal has been reopened to ease the bottleneck of marine traffic caused by the incident.

The current expensive traffic jam in the Suez Canal exposes the fragilities of populous trade routes. The excessive reliance of world trade on a few select trading ports and routes is unsustainable. The present crisis is a warning bell for industry and commerce stakeholders to adopt other viable means for logistics to maintain the inflating global supply chain.

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