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The economic impact from the Red Sea tensions

ARI SHAPIRO, HOST:

More shipping companies are steering clear of the Red Sea to avoid attacks by Houthi rebels. Last week's military strikes by the U.S. and Britain don't seem to have stopped those attacks. Houthis are now threatening to expand their campaign against commercial shipping in the region. NPR's Scott Horsley is here to talk about the potential economic fallout. Hey, Scott.

SCOTT HORSLEY, BYLINE: Hi, Ari.

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SHAPIRO: Another vessel was struck by a Houthi missile off the coast of Yemen today. No one was hurt. The vessel continued on its way. But how is this all affecting shippers' calculations?

HORSLEY: It is obviously a source of concern. Some companies have decided it's not worth the risk to take this Red Sea shortcut that connects Asia and Europe. Instead, they're going the long way, sailing all the way around the southern tip of Africa. That keeps those vessels out of harm's way. But it takes about nine days longer than the route through the Red Sea and Suez Canal. Ben May, who's with Oxford Economics, says shipping costs on the affected routes have tripled, although the cost is still well below what it was back in 2021, during the peak of the pandemic supply chain crunch.

BEN MAY: If you've suddenly got ships that are taking many days longer to sort of complete their journey, it's going to obviously have ripple through effects - not only delivering those goods later, but they're not at the place they're expected to be to sort of collect the next installment.

HORSLEY: Now, not everyone is opting for the longer, safer route. Chevron CEO told Bloomberg today his company has not changed its shipping operations. But the Wall Street Journal reports Shell has halted traffic in the Red Sea, and Maersk, the big container shipping company, took that step earlier this month.

SHAPIRO: Have these higher shipping costs shown up yet at the gas pump or on store shelves?

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HORSLEY: Not much. Right now this is really a bigger problem for Europe than it is for the United States. Again, the Red Sea offers a shortcut between European and Asian ports. And some companies like Tesla and Volvo have been forced to suspend some manufacturing operations in Europe because, say, car parts that ordinarily would have come via the Red Sea were held up. Ben May says the longer this drags on, the greater the risk those problems could multiply.

MAY: One of the real uncertainties is whether those shortages are enough to cause a lot of disruption, or it's the sort of thing that, you know, firms can get by by running down their inventories of inputs.

HORSLEY: It's less of an issue in the U.S. Most of the goods that the U.S. imports from Asia come across the Pacific Ocean to ports on the West Coast. So those shipments don't have to go through the Red Sea. And it's not - there's not as much cargo traffic anyway this time of year. We typically have a lull right after the holidays. We have seen some impact on global crude oil prices in response to Houthi attacks but not a whole lot. And retail gas prices in the U.S. have stayed pretty low.

SHAPIRO: That sounds promising. Does that mean that this is not likely to hurt progress that we've seen on inflation?

HORSLEY: You know, I don't want to minimize it. The Red Sea is a very important shipping lane. So there are lots of people who have a stake in getting this resolved. Federal Reserve Governor Chris Waller was asked today at the Brookings Institution whether he thinks this is likely to reignite inflationary pressures. Waller said probably not.

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CHRIS WALLER: There are alternative routes to routing stuff. It doesn't have to go through the Red Sea. So now you're just talking about substitution, about where are you going to go and how are you going to do it. I don't see it potentially being a big impact on certain global or U.S. inflation, unless this thing, you know, spirals into something much more severe than it appears that it is right now.

HORSLEY: People in the shipping business are constantly making adjustments for all sorts of reasons. I will just note that another big maritime shortcut, the Panama Canal, is also seeing delays at least through March because of drought. There's limited water to float the vessels through the canal's locks. As a result, some shippers were planning to bypass the Panama Canal and use the Red Sea-Suez route instead to get from Asia to ports on the east coast of the United States. That obviously looks a lot less attractive now.

SHAPIRO: NPR's Scott Horsley. Thank you.

HORSLEY: You're welcome.

(SOUNDBITE OF BADBADNOTGOOD AND GHOSTFACE KILLAH SONG, "STREET KNOWLEDGE") Transcript provided by NPR, Copyright NPR.

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Scott Horsley
Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.
Ari Shapiro
Ari Shapiro has been one of the hosts of All Things Considered, NPR's award-winning afternoon newsmagazine, since 2015. During his first two years on the program, listenership to All Things Considered grew at an unprecedented rate, with more people tuning in during a typical quarter-hour than any other program on the radio.
Linah Mohammad
Prior to joining NPR in 2022, Mohammad was a producer on The Washington Post's daily flagship podcast Post Reports, where her work was recognized by multiple awards. She was honored with a Peabody award for her work on an episode on the life of George Floyd.
Justine Kenin
Justine Kenin is an editor on All Things Considered. She joined NPR in 1999 as an intern. Nothing makes her happier than getting a book in the right reader's hands – most especially her own.