May 23, 2024


Positioning Aden

Gregory Brew and Kaleb Demerew on oil and the Red Sea

Prior to October 2023, about a seventh  of global maritime trade passed through the Gulf of Aden and the Red Sea to and from the Suez Canal. As a result of attacks by Houthi fighters on commercial ocean freight traveling through the area, that volume has fallen by more than half. Longer shipping routes around the Cape of Good Hope have increased freighting rates dramatically; the average price to ship a forty-foot container almost tripled from $1,400 to $4,000 between December and January. Today, the cost remains around $3,100. 

Longer freight routes also increased world demand for oil, both to power container ships and increase stocks from shipping delays. As 2024 has progressed, however, declining European purchases have offset this increase. As of May, Brent Crude prices remain at the annual average for 2023 of $82 per barrel. The International Energy Agency forecasts that world oil demand this year will increase by 1.2 million to 103.2 million barrels per day, while OPEC is forecasting an increase of 2.2 million to 104.2 million—about a 1–2 percent change, but headed in the wrong direction for the goal of climate change mitigation. 

In the following conversation, Phenomenal World editor Andrew Elrod speaks to Assistant Professor of Political Science at West Texas A&M University Kaleb Demerew and historian and analyst Dr. Gregory Brew of the Eurasia Group about the regional and global implications of the developments in the Red Sea region.

A conversation with Kaleb Demerew and Gregory Brew

Andrew elrod: Let’s begin at the regional level. What were the geopolitical tensions surrounding the Red Sea shipping routes prior to the Israeli assault on Gaza, and how has the Houthi response altered these dynamics?

Kaleb Demerew: The region has seen rising instability for decades. Competition between Ethiopia and Egypt, as well as between Iran and Saudi Arabia, has transformed the African coast into a strategic battleground. Turkey’s military base in Somalia, the Gulf States’ installations in Eritrea (along with a new $35 billion development in Egypt), and Ethiopia’s planned naval base in Somaliland are just some of the major indications that the traditional geopolitical divide between the Horn of Africa and the Middle East has eroded. The war in Gaza is intensifying these sources of instability. 

The Houthi attacks ought to be understood within this wider geopolitical context. Beyond the immediate war, the Houthis are advancing Iranian interests against those of the Egyptians and the Saudis, who are direct stakeholders. This is really about power projection—showing the extent to which Iran can arm proxies with sophisticated and highly impressive sea drones and undermine Saudi, and, by extension, American influence in the region. 

Gregory brew: These rising local tensions coincide with surprisingly stable global oil markets. In recent decades, the center of gravity of world oil production has shifted from the Persian Gulf to the Gulf of Mexico, while the bulk of oil consumption has shifted from the United States to China. Though the price of ocean freight spiked in January, the industry has largely adjusted. While the price of oil has oscillated, as it always does, based on perceptions of risk, overall prices have remained fairly stable.

This is in sharp contrast to the Yom Kippur War of 1973 or the Iranian Revolution of 1979, when events in the  region had cascading effects on the world order. Today, Saudi Arabia is shipping oil to China, while Russia has adjusted its trade by exporting oil to India. Formerly risk-heavy ties, such as Europe’s dependence on Russia or America’s dependence on the Middle East, don’t play as much of a role in the global energy economy as they once did.

This is in part due to the changes in the global energy economy that have taken place over the last twenty years, including the rise of the US as a major exporter.1 Attacks on shipping in the waterway have discouraged its use by Western shippers, indirectly encouraging dependence on shipping streams (at least in terms of energy trade) that avoid potentially risky chokepoints.

There’s no question that the violence in the Red Sea is disruptive—to the states of the region and potentially beyond, given how the US and a coalition of international partners have gotten involved. It’s only that the oft-assumed crisis pertaining to oil has not occurred. The world is not as it was in 1973.

Kaleb, assuming the US intervention in Yemen proves lasting (as I think is likely to be the case), what kinds of impacts could that have on the current situation inside the country, and could it prove to help or hinder Houthi consolidation of power while potentially destabilizing other parts of the Red Sea region?

Kd: At this point, there is a general consensus, even among the Saudis, that the Houthis will remain in North Yemen. The Houthis themselves seem to acknowledge their inability to capture Aden, particularly due to the Sunni majority there. The Saudis perceive that they need to act far more responsibly, given these realities, and given that they, not the UAE or the US, share a border with North Yemen. This explains both the China-brokered attempt at Saudi-Iran rapprochement early last year, as well as the Saudis’ relatively restrained response to the recent Houthi naval attacks. 

In recent years, the US has had a limited role in Yemen. Much of the US intelligence and logistical support to the Saudis and to the UAE happened prior to 2018. In 2021, the Houthis were targeting oil tankers and other strategic locations in both Saudi Arabia and the UAE with aerial drones. It was the Saudis bearing the brunt of these attacks. Even between Saudi Arabia and the UAE, there is no consensus on the future of Yemen. Even if North and South Yemen remain permanently separated, it would leave the Houthis with a continued presence on the Red Sea—for this reason, they do not really need to consolidate any more than they already have. 

The Saudis are already adjusting to this new reality, while the UAE is likely hoping to shift the balance a bit more. Meanwhile, the US is increasingly sidelined. In short, the status quo has already changed. Ultimately, the US may have to adjust to a reality that includes a sovereign state governed by a proxy of Iran, despite potential hesitations to formally recognize it.

Kd: What do we make of the increasing international disorder, on the one hand, and the relative stability in energy markets, on the other? 

GB: The fact that the global energy market has absorbed the Red Sea disruption may be linked to deteriorating regional stability. It’s why China has not gotten more involved, even though their trade is being affected. Ultimately, China is less threatened by a disruption in the Red Sea than, say, in the Strait of Hormuz where their energy supplies would be directly affected. 

The US would like to see a resolution to the problem but lacks the will to get involved, as the Red Sea isn’t a theater of national security priority for the US. So because buy-in is low, the capacity of local actors like the Houthis to produce instability is arguably higher. No one wants to take full responsibility for addressing the problem.

Kd: Energy is only one of several commercial goods that travel across the Red Sea, the  total worth of these goods being close to $1 trillion. To say that we do not feel the impact of Red Sea crises on energy prices is one thing, but to call it a “crisis that wasn’t” probably misses the mark. 

To Egypt, whose $8 billion bailout from the IMF did not even account for losing half of the source of its Suez revenues, this is certainly a crisis. To the extent that several Horn of Africa nations rely on wheat from Ukraine and Russia, interruptions in that supply certainly constitute a crisis. These economic crises in Northeast Africa are of great concern to the United States and its allies, given the concerns over terrorism and immigration. And this is all to say nothing of inflationary effects of the rising cost of container goods shipments. Certainly, consumers in the West having to pay a little bit more for manufactured goods does not constitute a crisis per se, but the inflationary effects will still be felt in the long term. 

And while the United States has successfully de-risked its energy supply chain, “de-risking” itself is not risk-free. In 2015, China invested about $250 million dollars in a port in Pakistan called Gwadar, with up to a billion dollars planned in  ancillary investments in infrastructure such as airports and desalination plants. The idea was that this port would provide a land bridge for the construction of an oil pipeline from China’s Middle East export partners that would bypass the Strait of Malacca, a small strip of ocean cutting across the Indonesian archipelago. China was always fearful that this strait could be easily blockaded by rivals like India or the United  States in the event of a military confrontation, leaving it effectively cut off from its energy supply. So, Gwadar represented the most important strategic tool for de-risking. However, just last month, separatist rebels launched a coordinated attack on Gwadar port, leaving some analysts wondering whether China’s presence in Pakistan could be sustained. Without Gwadar, China may become vulnerable again to an energy blockade. 

So, again, de-risking is not risk free. Domestic headwinds in US politics may impact its ability to continue producing oil at such high quantities soon, once again increasing its reliance on foreign exporters. The decline of the position of the Red Sea in global energy trade does not mean that Red Sea security is no longer high-stakes, even for the US. 

ae: To what extent are the rivalries in the Red Sea region constrained by the larger economic and military ties with China, Europe, and the United States? 

kd: Here is a counterfactual exercise that is of interest. Let’s imagine that the United States did not care about the Red Sea. Rather than attempt to flex its naval power in that region, it would look to revitalize its many bases in the Persian Gulf and continue to outsource Red Sea security to the Saudis. Clearly, this is not the case—just as the Houthis used the war in Gaza as a springboard to justify a campaign with broader aims, the United States, very early on, has used Red Sea instability to assert itself in the area in a very new way. 

Of course, it is doing so now through a multilateral coalition, compared to the unilateral campaigns of the early 2000s, when the US launched its first military base in the Horn of Africa. This all  means that policymakers in the US clearly see some bigger issues at play behind the Houthis’ unprecedented show of force, and the US is not content to repeat the mistakes of the pre-9/11 era and leave the Red Sea to the Saudis and the Egyptians. The same can be said of China, which now has a base in the Horn of Africa. China and Russia recently signed a deal with the Houthis for safe passage of their ships. 

The Red Sea remains the most important naval route connecting Europe with Asia, and this makes it vital  for naval mobility and logistics, especially since all the major powers now operate military bases in the region. In a conflict scenario, controlling or denying access to these waterways would entail a strategic objective to influence enemy military capabilities of adversaries and restrict the movement of naval forces.  This is what helped the Ottomans stake out their own sphere of influence despite the ostensible naval superiority of the Portuguese in the sixteenth century. So, given these strategic interests represented in this waterway, great power rivalries play a very significant role on both sides of the Red Sea. 

gb: I see a separation in commitment from states depending on their perceived interest in the region and their pre-existing commitments. Take China, for example. Beijing could take an interest in what is happening in the Red Sea, as the trade linking China to Europe and North America is the most directly affected. The Chinese ostensibly have aspirations to expand their influence in the Middle East. But they have shown very little interest in getting involved. Europe, likewise, has mobilized military forces to safeguard shipping, but is ill-equipped to address the core problems. The US has the military power to bombard the Houthis, but it cannot muster the diplomatic strength to find a workable solution to the crisis in Yemen or the violence in Sudan or Ethiopia. These challenges are further compounded by the fact that local states—Saudi Arabia, the UAE, and Iran—have become involved and largely pursue their own interests, rather than solutions that would reduce instability in the area.

kd: To the extent that the Chinese do not seem as outwardly concerned by Red Sea instability as the United States, I think this may have more to do with a cost avoidance strategy. Since the US has already engaged a ten-country coalition to counter Houthi attacks, China can choose to sit on the sidelines and avoid creating new antagonisms, especially since they do not feel directly targeted by the Houthis. This is fairly in line with the Chinese approach to risk in international engagements, and indeed, even some European countries, such as France, have recently started to dial back their commitments to supporting the coalition. I agree with Greg on this point: in a sense, nobody, not even the United States, wants to take responsibility for stability in the Red Sea. But, ultimately, situations may necessitate stronger engagement.

ae: How could events in the Red Sea reinforce or undermine the broader security settlement, in which US allies Egypt, Israel, and Saudi Arabia are arrayed against Iran? 

gb: The view from Saudi Arabia is that Iran is an enemy, and one that should be countered, but through a variety of means, not simply military strength. The purpose of the security arrangement with Israel—the so-called Grand Bargain—is to contain Iran, but Riyadh sees it first and foremost as a way to obtain valuable concessions from Washington that would help balance the potential threat posed by Iran. A security guarantee from the US would preserve Saudi Arabia from attacks like the September 2019 assault on Abqaiq. There is also increased concern over Iran’s capabilities following Iran’s attack on Israel on April 14—even though that attack did little damage, it demonstrated the power of Iran’s drone and missile arsenals. Yemen is, for Saudi Arabia, a crucial security challenge and one that it will attempt to manage with its tenuous normalization with Iran in mind. For Iran, the Houthis offer a certain degree of insurance against Saudi and Israeli pressure, since it is from Yemen that Iran and its Resistance Front alliance can threaten the states of the Gulf. 

kd: The interesting part here is that the Saudis do not seem to feel as threatened by the Red Sea attacks as the United States and the EU. For the most part, they are still shipping oil containers and commercial goods through the waterway and they do not feel that the Houthis will target them. At the same time, the past year can be considered an era of gradual Saudi–Iran rapprochement, first with the China-brokered meeting  between the two countries, and now with the Saudis seeking some kind of settlement in Yemen. 

The Saudis are most concerned about economic expansion and to the extent that Iran does not threaten MBS’s economic vision, I think Iran seems less and less like a threat to the Saudis. This doesn’t mean Iran and Saudi Arabia will ever become partners—indeed, they will likely remain rivals but will seek to pursue their rivalry in ways that minimize direct confrontation. To the extent that the Saudis consider the Red Sea their own sphere of influence, they may not tolerate continued Iranian activity there. And this is perhaps one of the  reasons the Houthis have been acting at their own discretion and gradually moving outside of Iran’s operational control, certainly in terms of their Red Sea engagement. The fact of the matter is the Hamas  attacks on Israel severely tainted the environment for the future of Israel–Saudi cooperation. What this  means is the Saudis will probably try to remain restrained in terms of their engagement with both Iran and Israel in the short term. Meanwhile, through the recent barrage of rocket attacks against Israel, Iran is demonstrating an unprecedented capability to coordinate with its proxies in the Red Sea region. This all motivates more active US and EU involvement in the Red Sea, which is exactly what we are seeing.  

ae: What are key economic trends in the region to watch that could bear out or contradict your answers above? Are there particular development projects, commodity markets, or other markets we should be paying attention to?

kd: If the conflict is sustained, and if commercial ships continue traversing the African continent to sail across the Cape  of Good Hope, the Red Sea will certainly lose much of its relevance. Of course, this will have very clear inflationary effects, but as long as the costs can be passed off to consumers,  I can see companies choosing to pay the higher shipping and insurance costs to avoid the political risks of the Red Sea. But even if the Red Sea’s economic significance were to diminish, its importance for military strategy will remain. In fact, in this scenario, I would expect more military naval activity in the Red Sea and the Gulf of Aden, not less. With commercial activities out of the  way, the costs of military (naval) engagement would be dramatically reduced. 

gb: Most of the major energy producing states of the Middle East are trying to get away from dependence on energy exports. Saudi Arabia, the UAE, Kuwait and others are all embracing economic development strategies that pursue the energy transition. Yemen, on the other hand, will need to tap its fossil-fuel resources—oil and gas—to fund its economic recovery after decades of war. It’s tough to see how Yemen escapes its current humanitarian and economic predicament without leveraging these resources. So, as counter-intuitive as it may seem, I think increased interest in developing these resources, in the pursuit of helping to bring peace to Yemen, can (in the short-term) form part of a broader strategy, one that regional states can take a large part in leading, even as the general trend is away from fossil fuel exploitation. 

ae: The future of the world order has an immediate political salience this year, with the US election and the  division within the Congress over supplemental military spending for Ukraine and Israel. Do you see US  domestic politics as a variable in the regional situation around the Red Sea? 

kd: To a certain extent, yes. As we have seen with the procession of the Abraham Accords, there is a manner in which a Trump presidency would reshape the scope and manner of US engagement in the Red Sea.  However, just like it would have been hard to predict the Abraham Accords, or Hamas’s attacks on Israel, it would be impossible to predict precisely what these changes will look like, or even whether this will make the region more or less stable.

gb: I think both a Biden and a Trump administration would face a very difficult road ahead with regard to Yemen. Military strength cannot accomplish the US goals against the Houthis, but a Trump administration would likely favor increased use of military force, potentially spreading the fight to include Iranian targets, as there is broad support for the idea that pressure on Iran will rein in the Houthis. So there’s a risk of the conflict growing under a Trump presidency. But the outlook for Biden isn’t much better. The US doesn’t have effective means of leverage to compel the Houthis to change their actions.

  1. According to the US Energy Information Agency, annual US crude production doubled since the year 2000, from 2.1 billion to over 4.7 billion barrels; exports have increased eighty-fold, from 18 million to 1.5 billion barrels annually. Natural gas production doubled from 24.2 trillion to 45.6 trillion cubic feet per year in the same period; exports increased more than thirty-fold from 243 billion to 7.6 trillion barrels annually.

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