The Cost of the Suez Canal Blockage on the Global Economy

Suez Canal Blockage And Its Impact On The Global Economy

The Suez canal blockage, caused by the grounding of a 1300 feet container ship, is one of the most highlighted incidents of 2021. On March 23, 2021, Ever Given’s mammoth-sized vessel lay stuck across the narrow section on the canal’s south. For the next six days, hundreds of other container ships laid stuck in a queue leading to a massive loss of hundreds of millions of dollars.

The disruption came in the early morning of March 23, when strong winds battered the ship. The bow of the 220-kiloton ship was stuck in the eastern bank while the stern lay on the western bank. The Suez Canal Authority responded swiftly and worked closely with the experts in marine salvage operations. It took six days of towing and pushing, and dredging, and the ship was finally afloat on March 29.

Why Is the Canal So Important?

The Suez canal blockage has highlighted the importance of this busy channel on a global scale. But why is it so important? Entering into the service for the first time in 1869, this man-made waterway accounts for more than 12% of the global trade at present. Cutting through the African nation of Egypt, it connects Port Said in the Mediterranean Sea to Suez in the Red Sea. This allows for direct shipping between Europe, Asia, and the eastern parts of the United States.

Let us take an example. Consider a ship carrying crude oil from the Middle East to Europe. Without the Suez canal, the ship has to circle Africa’s Cape of Good Hope. The distance is an extra 6000 miles. The additional costs in fuel would be hundreds of thousands of dollars.

In addition to its value for global trade, it also has a long-standing history and relationship with Egypt. Egypt first nationalised the canal in 1956. As a result, attempts of invasions came in from the British, French, and the Israelis, forcing it to shut down from October 1956 to March 1957. Again, during the Arab-Israeli war in 1967, the canal was closed for eight years. Today, it is owned by Egypt’s state-owned body, the Suez Canal Authority. The authority generates more than 5 billion US dollars in revenue for Egypt’s government.

Impacts on the Global Economy

Oil Prices on the Rise

Following the Suez canal blockage, oil prices jumped more than 4% as fears grew that it would take weeks to refloat the blocking ship. Brent crude rose by 3.8% to 64.32 USD a barrel, following a 3.8% loss on the previous day. Likewise, US West Texas Intermediate (WTI) increased by 4.1% to $60.94 a barrel, following a drop of 4.3% the day before.

As of 2020, 1.74 million barrels of crude oil and 1.54 million barrels of refined oil products passed through the canal.

Manufacturing Delays in Europe

The Suez canal blockage will cause manufacturing delays in several industries, and Europe will mostly be on the receiving end. The blockage stuck raw materials and parts coming from Asia. For example, cotton being transported from India will cause manufacturing delays in the clothing industry. Similarly, a delay in petroleum products coming from the Middle East means a delay in the manufacturing of plastics and other materials. The automotive industry will also feel the impact as auto parts coming from China stay stuck in the sea.

Container Shortage

A shortage of shipping containers was already a concern as demands for consumer goods went up during the pandemic due to the Suez Canal blockage. The empty containers that were to be returned to Asia were stuck, worsening the already existing concerns. As of now, we see a shortage of containers for goods being transported from India, China, and Indonesia to the rest of the world.

Congestion in Ports

Due to the Suez canal blockage, hundreds of ships were stuck in the process. When the canal was finally freed after six days, ships started flocking the ports of Europe in record numbers. This means the warehousing, trucking, and terminal operations in these ports will be naturally affected.

The Cost of the Suez Canal Blockage on the Global Economy

Preventing Similar Events in the Future

Maritime shipping is a key part of the foundation that makes the global economy tick. The Suez canal blockage has shed light on our negligence in the maritime shipping industry. Now, we have no other options than to learn from this incident, make necessary improvements, and prevent similar events in the future.

Rethinking the Size of Ships

The Suez canal blockage has brought concerns over the rapid increase in the size of ships carrying containers. Before the turn of the century, the largest ships in operation would carry a cargo of fewer than 8000 TEUs. Ever Given, the blocking ship that came into operation in 2018, carries more than 20,000 TEUs of cargo. This is one of the largest ships that sail the seas and oceans of the world at present. However, it does not end here. We are already talking about 25,000 TEU vessels and they are not very distant.

This dramatic increase in ship sizes is efficient and profitable for shipping companies, but it does bring problems. The mammoth-sized vessels operating today are the upper limit of what can fit in major shipping lanes of the world. If we do not keep track of these sizes, these problems will become more frequent.

Alternative Routes

When the global economy takes a hit due to a single ship, it is time to question the availability of alternative routes that are fairly cost-efficient. And, proposals are starting to pop up again. Israel is proposing the Ben Gurion canal project, which would be fairly as efficient as the Suez. Similarly, Russia is proposing the use of the Northern Sea Route along its Arctic coast.

Widening Narrow Lanes

One of the options to prevent a similar incident like the Suez canal blockage is the widening of narrow lanes. The canal authority is already planning to extend the southern section by 40m to the east. The expansion will take up to two years in case everything works normally.

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In this blog, we came across the Suez canal blockage incident, which was one of the most highlighted events in 2021. First, we inspected the incident itself, looking for the causes to the disaster. Second, we saw the importance of the canal for global trade and economy and how it is more cost-efficient than other options. Then, we looked at the major impacts caused by the blockage in the global economy. Finally, we concluded with the ways to prevent such mishaps in the future.

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