Industry Update

Industry Update: The Suez Canal

In the maelstrom of geopolitics, recent conflicts in the Middle East have far-reaching consequences that extend beyond the battlefield. The Israel-Palestine War, a long-standing and deeply complex struggle, has been at the core of global attention for decades. While its implications on international relations and humanitarian crises are primarily analyzed, one topic that often remains hidden in the shadows is the significance of the global oil and gas industry within the region. As tensions continue to rise, the flames of the delicate and intricate web of energy, politics, and resources could ignite a firestorm in the oil and gas industry with consequences felt far beyond the borders of the Middle East.

Significance

The Suez Canal, a strategic route for Persian Gulf crude oil, liquified natural gas, and petroleum products, serves as the fastest sea route between Asia and Europe, directly connecting the Arabian Sea, the Indian Ocean, and the Asia-Pacific nations with European waters. Substantial costs and extended voyage durations would be of consequence without the Suez Canal. The canal is an example of an “open choke point,” meaning ships have the option to go around it, but at a hefty cost. As a result, if the canal is ever shut by regional conflict, shipping between these regions would require circumnavigating the entire continent of Africa. Currently, about 12% of total global trade of all goods and 30% of global container traffic pass through the canal. Because of its strategic location, the canal facilitates the transfer of about 7-10% of the world’s oil and 8% of liquefied natural gas, as reported in 2021.

History

Viewed as an opportunity for Egypt and the Ottoman Empire, and following the discovery that the Red and Mediterranean Seas were about the same altitude, construction of the canal began in early 1859 and spanned a period of ten years. The Suez Canal opened on November 17, 1869 under Ismail Pasha, Khedive of Egypt and the Sudan.

In 1956, Egypt nationalized the canal, which led to an invasion by Britain, France, and Israel, prompting the Suez Crisis. The United States, the Soviet Union, and the United Nations subsequently intervened, compelling Britain, France, and Israel to withdraw. Shortly thereafter, the canal suffered significant damage during the Six Day War in June 1967 when Egypt clashed with Israel. Egypt ultimately regained full control of the canal after the Yom Kippur War and successfully reopened it in June 1975.

In March 2021, the six-day grounding of the MV Ever Given, one of the world’s largest container ships, caused significant disruption in the Suez Canal, highlighting the canal’s critical role in global trade. This disruption resulted in vessel backlogs, shipment delays, and impacts on industries such as oil and gas. The incident immediately impacted oil and gas markets, nearly doubling shipping rates for oil product tankers due to lengthy detours around Africa and worsening the already existing shortage of shipping containers caused by supply chain issues brought about because of the COVID-19 pandemic. The blockage also had implications for crude oil prices, temporarily increasing them due to supply chain uncertainty and more importantly, it emphasized the weaknesses and challenges faced by such a crucial water channel in the oil and gas industry.

Current Challenges & Prospects

Recessions often find a catalyst in unexpected triggers, and one such trigger has historically been the sudden surge in oil prices. The price of crude oil is intrinsically responsive to geopolitical events in the volatile Middle East region, as a vital global commodity. However, beyond this situation, recent developments have added another layer of uncertainty. Zim, one of the world’s major ocean carriers, based in Haifa, Israel, has announced the implementation of a war risk premium. This decision stems from concerns about potential disruptions to its services related to the ongoing conflict in the Middle East, especially in proximity to Israel. Furthermore, BP announced that it will suspend oil shipments through the Red Sea due to attacks from the Houthi rebels, which possibly contributed to the rise in Brent crude prices this week.

This confluence of potential risks and factors, including war risk premiums, the possibility of vital trading channels such as the Suez Canal being shut down, and a halt or decrease in crude oil export from the region, constitutes a worrisome recipe for an economic recession. The blockage of the canal in 2021 serves as a stark reminder of the fragility of global supply chains, highlighting the importance of continuous monitoring and infrastructure enhancements to ensure uninterrupted worldwide trade. Actions to increase the canal’s capacity, such as the current widening project, are vital to accommodate increasing trade demands and ensure the smooth transit of goods, particularly in the case of critical commodities like oil and gas.

Rising oil and gas prices have put the US in a position where it may need to consider expanding its production and exports. As emphasized above, the surge in global energy costs is driven by various factors, including geopolitical tensions and increased demand. To alleviate any such economic burden and maintain energy security, the US might be compelled to drive up domestic production of oil and gas. This could also present an opportunity for the US to bolster its position as a significant oil and gas exporter. Balancing these factors is vital to ensure energy stability in such an interconnected world.

In conclusion, the global economy remains vulnerable to shocks arising from unexpected triggers. The instability in the Middle East, coupled with imposition of war risk premiums by major players in the shipping and trade industry heightens these concerns. When combined with the potential closure of vital trade routes, such as the Suez Canal, and disruptions in oil and gas exports, the stage is set for the possibility of an economic crisis. The emphasis on the need to pursue ongoing efforts to bolster the Suez Canal’s capacity and efficiency, coupled with more US based oil and gas production, has never been more critical to avoid the ignition of any firestorms within the oil and gas industry.

Kuiper Law Firm, PLLC specializes in oil and gas title examination, acquisitions and divestitures, and all aspects of domestic onshore operations. Additionally, we will continue to monitor and provide industry updates. If you have any questions about the information in this article, or issues relating to the above-described services, please do not hesitate to contact us.