World markets for energy experienced a shock this week as oil prices surged beyond the much watched 105 dollars a barrel level on the back of rising worries over further trouble in strategic shipping lanes in West Asia. Brent crude, the global benchmark, surged past 105 dollars a barrel to touch a high of near 108 dollars, while West Texas Intermediate registered a strong run past 100 dollars a barrel. The level was the highest beyond the century mark in months and served as a reminder of how fast regional turmoil can spill back into the system.
The immediate trigger was set off by lightning advances of Yemen’s Houthi insurgents down the Red Sea coast. Media reports came to the then-conclusive avail that their forces had seized the port town of Mocha and had pushed further south towards Perim Island, a key outcrop located deep in the heart of the Bab el-Mandeb Strait.
This is a narrow passage linking the southern tip of the Red Sea to the Gulf of Aden, through which passes a substantial proportion of the world’s trade and energy shipments. Since the Strait of Hormuz was already strained by the ongoing Iran crisis, the southern route had become an increasingly vital alternative for the Saudi state and other producers than a stable beeline to world markets for long and cheap crude. Market players responded as the true chokepoint factor that it is, with the sort of panic that only real chokepoint considerations can provoke.
Asian refineries short of barrels from elsewhere fought out bidding wars, pushing prices higher and higher. Shipping routes, insurance premiums, and doubts about further output cuts if things got worse, began to change as traders questioned the prospect of further production cuts.
The Red Sea flow of Saudi crude had already “plummeted” in recent weeks, in the face of threats from earlier Houthi advances, and the side was unprepared to be further weakened. Apart from the short-term jump in price, the developments highlight the depth of the world’s energy security vulnerability. Blockage of one key route simply reallocates flows to the next. If the next route then becomes congested, traders will quickly see space opening up on the third route, and prices responding as a result. This has recently been seen in diesel prices in the USA, where nationwide figures have for the first time in this cycle crossed the $6 a gallon mark, further squeezing the transportation and manufacturing industries that spend the most on fuel.
Market participants and policymakers are carefully considering whether the development will intensify or but pave the way for some diplomatic resolution, reducing shipping hazards. The International Energy Agency and some other observers pointed to the combination of circumstances at work, with export supply adjustments by major oil exporters and a sequence of regional crises. Consumers might notice the cost increases step by step, as a consequence of higher petrol prices or greater for products relying on energy-expensive logistics. Still, the important point is that there are no weapoms to prolong and magnify these shocks as markets have been known to work fast in easing these disruptions once other routes, stocks or policy measures find their way into the system.
