Red Sea crisis a risk for EU economy, energy supply and prices – trade chief

“We see already that there are disruptions to the shipping routes concerning the Red Sea and, correspondingly, the use of the Suez Canal,” Dombrovskis said.

“Currently, we see that the effects of those disruptions are contained. Also their effects on, for example, oil and gas prices, are contained,” he added. “But certainly this is a risk for the European economy which we need to follow very closely.”

Dombrovskis’ warning came as a Greek-owned vessel carrying the Maltese flag became the latest target of a missile by Yemen Houthi rebels.

A recent raft of attacks by Iran-backed Houthi rebels on international commercial vessels in the Red Sea has forced many major shipping firms, some European, to avoid the area. 

The Red Sea and the Suez Canal are one of the world’s most strategic maritime trade routes, where around 15% of global shipping traffic passes. The alternative detour around the Cape of Good Hope can add as much as a month of journey time, threatening to upend world trade with delays and added costs.

Four of the world’s five largest container shipping firms have either paused or diverted their Red Sea operations, including Danish-owned Maersk, whose vessel was attacked by Houthi rebels earlier this month.

The Houthis claim they are targeting Israeli-owned ships in response to the conflict in the Gaza Strip, but US and European vessels have also been sabotaged.

US- and UK-led retaliation in the form of airstrikes on Houthi targets in Yemen has so far failed to force the Houthis to withdraw, and fuelled fears of a further escalation of the conflict brewing in the Middle East.

Western nations, as well as Iran, have sent warships to patrol the area and protect vessels from sabotage. A US-led naval mission originally enlisted the support of 20 countries, but many have pulled out over fear of escalation.

The EU is also mulling its own bespoke operation to protect European vessels in the area.

Implications for Europe

The Houthis have vowed that the US and UK’s airstrikes “will not go unpunished”, sparking fears more European and international firms will choose to use the alternative Cape of Good Hope route for fear of retaliation.

Economists warn of a domino effect that could eventually hit European consumers.

“Europe and its people can expect to face higher energy costs, delayed shipments, and a return of inflation resulting in higher and longer-lasting interest rates,” economist Osama Rizvi wrote for Euronews.

Since Russia’s invasion of Ukraine in early 2022, the EU has upped its oil imports from the Middle East as part of attempts to wean itself off Russian energy products, resulting in an increased EU reliance on oil passing through the Red Sea and Suez Canal.

The EU’s economy commissioner Paolo Gentiloni warned Monday that the tensions could eventually lead to a spike in energy prices in Europe.

“What is happening in the Red Sea (…) is not for the moment apparently creating consequences on energy prices and inflation,” Gentiloni explained.

“But we think that it should be monitored very closely because these consequences could materialise in the coming weeks,” he added.

Supply chains hit

In a sign that industry is feeling the knock-on impact of the crisis, Tesla, Volvo and Suzuki have all announced they will suspend production at European factories due to supply chain issues resulting from the Red Sea attacks.

American multinational Tesla said last week it would pause most car production at its Berlin-based Gigafactory because of a shortage of components. Swedish multinational Volvo, which is majority Chinese-owned, has also suspended production at its plant based in Ghent, Belgium, because of delays in deliveries. 

Suzuki Motor became the latest to announce a suspension in operations on Tuesday. It will pause production at its Hungarian plant for seven days.

According to the Wall Street Journal, British oil giant Shell also paused all Red Sea shipments on Tuesday due to escalating tensions in the area.

Qatar’s prime minister also sounded the alarm on Tuesday, warning shipments of liquified natural gas (LNG) will also be affected.

“LNG is… as any other merchant shipments. They will be affected by that,” Sheikh Mohammed bin Abdulrahman Al Thani said from the World Economic Forum in Davos.

Reuters reported that QatarEnergy, the world’s second-largest LNG exporter, had temporarily paused journeys through the Red Sea route on Monday. But shipping tracker data showed that some Qatari LNG vessels had resumed course on Tuesday.