Under-Appreciated Risks Of The Red Sea Crisis
As Zero Hedge reported yesterday, despite the U.S. military's new operation to protect shipping in the Red Sea from Houthi rebel attacks, many cargo ships are switching to the 40% longer route around the Cape of Good Hope in South Africa. Aside from the increased costs to global shipping, and the risk of America getting into a shooting war in the Mideast, there are some additional, under-appreciated risks.
Although Zero Hedge has been covering this issue prominently, mainstream financial media hasn't been.
Shipping lanes get shut down and the US Navy announce an operation to try to force them open and today there’s nothing on the front page of the major financial publications.
What Happens To Egypt?
Our friend Aristophanes makes a good point in his long post on the Red Sea situation, that to the extent Iran is arming the Houthis, who are driving shipping traffic away from the Suez Canal, Iran can exert leverage on Egypt in ways that can make the Israel-Gaza war worse.
This Red Sea situation is very very bad. And while the best person to consult is a logistician, I want to take a laymans stab at it.
Currently, container ships are being attacked regularly with anti ship missiles and drones via the Houthi's(Iranian Proxies in Yemen). The USS Carney, an American destroyer, has been in the region responding to attacks and shooting stuff out of the air. They've seen more action on the water in weeks than the entire USN saw on the water during GWOT in 20 years.
This puts the US in a decision dilemma. Our mandate of heaven to justify the unipolar order is based upon the power of the USN to facilitate safe global trade. It's the beating heart of the international westphalian peace, the Pax Americana. The Biden Administration has had a lackluster response, probably due to its State Department being in a love affair with Iran.(In which an underreported Iranian spy ring was uncovered recently that the media is reticent to talk about)
Maersk and other shipping giants were able to flex on the DoD to do something about it. Which is why more USN assets are being diverted to the Red Sea. But this doesn't resolve the strategic problem. What do we do about this?
The US is in what's called a "decision dilemma", or a situation where there isn't a favorable outcome. As Lloyds moves to raise insurance rates on Suez transits (costs that will be passed downstream) or remove insuring these routes altogether (it's pretty expensive to have a cargo ship get hit by a missile) I feel Egypt is a major fulcrum of this problem.
A massive share of Egypts income comes from the Suez Canal. This broke a record in 2022 at 9.4 billion USD, which is almost 30 percent of their annual revenue. If the Suez is closed, they aren't making money. The Egyptian Government is also stressed from multiple angles. They have a refugee crisis on their border with Sudan, but particularly topical right now is their land border with Gaza. The Rafah Crossing is the only link into Gaza that is not controlled by Israel. Iran having a quarter of the Egyptian economy by the balls unless the US intervenes, means Iran has leverage over what gets into Gaza. If you use your imagination, this could include anything from chemical weapons in Syria, to a dirty bomb or even a nuclear weapon from Iran being not beyond the realm of the possible. This is a nightmare scenario for the US because such an event might force a more tangible military commitment in the region than we already have.
The other alternative is the US military escalating the middle eastern situation by striking Houthi capabilities in Yemen. This is well within the capabilities of the DoD to do fairly easily, and the State Department to handwave fairly easily, as the Houthi's are distinct from the Yemeni Govt that is officially recognized by the west. But it might invite retaliatory attacks on US Navy ships docked at any number of CENTCOM ports. Imagine a flight of drones causing a USS Cole situation in Bahrain or Djibouti.
So that seems to be the decision dilemma. If we do nothing, Egypt faces economic instability, which impacts the crossing into Gaza, the US appears unable to keep the trade lanes safe, and eventually a ship is going to sink.
But if we retaliate, we are escalating the situation into one which invites retaliatory strikes of a greater intensity. One which demands further military commitments and puts the Biden Administration in a very tough spot considering the current bottom-up pro Palestine and top-down pro Israel situation here at home that they've been straddling the fence on, right as an election year starts up.
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