The Indicator from Planet Money - Strait talk: Why the oil crisis is getting worse

Starting point is 00:00:00 NPR. Welcome to Straight Talk, where we break down what's happening in the world's most important trade choke points and strategic seaways. Straight Talk, so serious, Patty. This is serious business, Ricky. No argument here. So let's get into it. By now, after more than six months of war with Iran, you probably know all about the Strait of Hormuz. It's the vitally important gateway to the Persian Gulf.

Starting point is 00:00:30 Today, we're going to introduce you to another Strait, about 1,300 miles away called the Strait. of Babel Mendeb. The Babel Mendeb is a narrowing of land with some islands in the middle that basically controls the southern access of the Red Sea. That was economist Rachel Zyemba. This is the indicator from planet money. I'm Paddy Hirsch. And I'm Ricky Mulvey.

Starting point is 00:00:57 On today's show, the Bab El Mendeb Strait, what it is, why it's in the news, and how it might change the game in the war with Iran. It's straight talk. from the indicator. Coming up after the break. The Red Sea is that long, narrow waterway that stretches between northeast Africa and the southwest of the Arabian Peninsula. It's a seriously important stretch of seaway. In normal, unturbulent times, almost 15% of the global seaborne trade passes through the Red Sea. That includes 30% of the world's container traffic, 12% of the world's oil traded by sea, and 8% of the world's liquefied natural water. gas. At the top end of the Red Sea, you've got Egypt and the Suez Canal, which leads to the

Starting point is 00:01:42 Mediterranean. And at the bottom end, there's a narrow stretch of water that leads to the Indian ocean and the Asian trade routes. That stretch of water is the straight of Babel Mendeb. Until recently, the Yemeni government had been controlling some of that area. Rachel Zemba covers global political and economic risk at the center for a new American security. Now we have a circumstance where the Houthis, from the government's been battling for a long time, seem to have seized that land. Seem to have. I need straight talk, Rachel. It sounds like spin to me. The no spin zone. It's a straight no spin. The Houthis, they are a rebel group that's been slowly taking over control of large parts of the country of Yemen since at least

Starting point is 00:02:27 2014. They're allied with Iran. Some call them a proxy. And they're fiercely opposed to Israel's existence in the way Israel is conducting the war in Gaza. In November 2023, the Houthis began targeting Red Sea shipping as a way to put pressure on Israel. They hijacked some ships and attacked others with drones and missiles. U.S. forces punished them for this with a bombing campaign, and things seemed relatively quiet in the Red Sea for a while. But at the end of last week, the Houthies made their move, possibly in support of Iran, and seized control of a swath of Yemen's Red Sea coast. That includes an island right in the middle of the Babel-Mandeb Strait, Barim Island, what the military calls key terrain because it dominates the strait, which is only about

Starting point is 00:03:12 18 miles wide at its narrowest point. Whoever controls that choke point can have say over which vessels can pass through. Red Sea traffic has already slowed down, thanks to those Houthi attacks on shipping prior to the war with Iran. Initially, it dropped by 50 percent, and it is never fully recovered. Now, the capture of Badim Island threatens to stop that traffic altogether. Rachel says this is a particular problem for Saudi Arabia. The Saudis have been using the Red Sea in the Babal Mandib Strait as an alternative oil shipping route after Iran closed the Strait of Hormuz, more than six months ago. Last week, the Saudi's pipeline to the Red Sea was attacked by drones. Then this week, the Saudis suspended oil shipments from a Red Sea port.

Starting point is 00:03:57 They had been using their east-west pipeline to get fuel to market even as the Strait of Hormuz was disrupted. This puts more pressure on what had been a lifeline for the Saudis and indeed for the global economy of getting fuel out through another channel. The Houthis could close the Bab El-Mandib straight at any time. So far, they haven't. But Rachel says just the fact that they can close it is having an effect. Analysts talked about Schrodinger Strait. I need to write a piece on that. Schrodinger straight.

Starting point is 00:04:33 Who came up with that? That is so good. This question of, is it really open? Is it really closed? Just this uncertainty about, is it open or closed? The costs, the physical risks remain high. These elevate insurance costs. They elevate anchor rates.

Starting point is 00:04:51 And all of this just adds friction to the global economy. We're already feeling that friction. When news of the Houthi advances broke last week, oil prices spiked to more than $100 a barrel. Rachel says the timing of this takeover of the Strait of Babelmendeb is proving to be critical. All of this is happening at a time where there was a growing supply deficit that had been building up that was only partly addressed by bypass and drawing down strategic petroleum reserves. It's also happening at a time where there is significant. significant outages of refineries, which are meaning not only does the crude oil price go up,

Starting point is 00:05:31 but the price for oil products like diesel and gasoline have gone up proportionally greater just because it's been harder to get refined products to market. And it's not just oil products. The strait sees the passage of a lot of other key commodities, including fertilizer and natural gas. If it's a cold winter in Europe, that will. be challenging. We're also still seeing sulfur, which is a byproduct of natural gas and fuel production, those supplies are more constrained. Sulfur is important because it's used in processing metals, including copper. And helium is used as an input into semiconductors as well as into various

Starting point is 00:06:17 medical devices. Helium is also a byproduct of natural gas deposits. Now, the U.S. and Canada and some other nations are producing more of some of these commodities and offsetting some of the price hikes, but not by much, Rachel says, which means it won't be long before the shortages created by this new disruption to trade will filter through to us. You know, if you're thinking about your pocketbook, Americans should care because these are global markets, and we can't just build barriers and stop importing. There may be U.S. producers who benefit from shortages. but the American consumer tends to suffer in these contexts.

Starting point is 00:06:59 Rachel says it's not just price hikes we should be worried about. The knock-on effects of the Houthi's actions, in conjunction with Iran's refusal to capitulate, is straining relationships between nations in the region and between the U.S. and its allies in the Middle East. Deterioration in America's rule with its allies might make other U.S. policy goals more difficult. For example, some of these countries in the Gulf are significant investors in the United States

Starting point is 00:07:29 and key to developing and on-shoring production here. From the beginning of the war with Iran, the main focus has been on oil. Saudi Arabia's pivot to increasing oil exports through the Red Sea and the Strait of Babelmandep was seen as a creative workaround that helped buffer the global economy and keep prices down. But Rachel says this latest action by Yemen's Huthies that this second strategic and highly vulnerable straight shows just how fragile and unsustainable such workarounds really are. Now that's what I call straight talk, Patty.

Starting point is 00:08:04 Would you say dire straits, Ricky? Oh, do they want money for nothing? This episode was produced by Julia Ritchie with engineering by On Lee Huang. It was fact-checked by Sierra Juarez. Kate Canaan edits the show. The Indicator is a production of NPR. Next week on Straight Talk, five ways to kill time, while your ship waits for a military escort. We'll see you next week.

The Indicator from Planet Money - Strait talk: Why the oil crisis is getting worse

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