Oil Prices Soar by 4% as US and UK Launch Strikes in Yemen, Risking Energy Shock

London, United Kingdom – Oil prices surged by 4% in response to the United States and the United Kingdom launching strikes in Yemen. The military action was taken in retaliation for recent attacks by Houthi rebels on ships in the Red Sea. Brent crude, the international benchmark for oil prices, reached $80 per barrel, its highest point this year. The rebels, backed by Iran, have vowed to retaliate against these Western-led strikes. Despite the price increase, oil prices remain below the highs seen during the Russian invasion of Ukraine.

The UK government is concerned about the potential impact on cargo traffic and the economy if the disruptions in the Red Sea continue to spread. The Treasury has already modeled scenarios that include crude oil prices rising by more than $10 a barrel and a 25% increase in natural gas prices. On Friday, Brent Crude hit $80.55 per barrel, while US West Texas crude rose by 2.71% to $74.73.

The ongoing attacks on shipping in the Red Sea pose a threat to the UK economy, which is still recovering from the effects of the pandemic. Higher energy prices could fuel inflation, just when it has begun to slow down. Moreover, the increased cost of shipping containers may lead companies to pass on the expense to consumers.

Prime Minister Rishi Sunak acknowledged the “major disruption to a vital trade route and [higher] commodity prices” caused by the attacks. However, Simon French, the chief economist of Panmure Gordon, noted that current energy prices are still considerably lower than they were four months ago. He believes that when the Bank of England makes its next interest rate decision in February, oil prices will likely be around 20% lower than they were in the autumn.

Houthi rebels in Yemen have intensified their attacks on commercial vessels since the start of the Israel-Hamas war in October. The US has reported 27 attacks in the Red Sea since mid-November. The rebels have been using drones and rockets to target foreign-owned vessels passing through the strait of Bab al-Mandab. As a result, many companies are diverting their vessels around the Cape of Good Hope, adding at least 10 days to their journey.

About 15% of global seaborne trade passes through the Red Sea, handling 8% of global grain, 12% of seaborne oil, and 8% of the world’s liquefied natural gas, according to the White House. The attacks have already caused significant disruption to global trade, affecting companies such as Tesla, Tesco, Next, Ikea, and Danone. Maersk, one of the world’s major shipping lines, has been avoiding the Red Sea route to prioritize crew safety. This route diversion has added extra travel time and increased fuel costs.

The attacks on vessels have led to record-high prices for container transport and goods. The Drewry World Container Index reported pricing for a 40ft container reaching $3,072 on January 11. These disruptions are already impacting people’s daily lives worldwide.

In summary, oil prices surged after the US and UK launched strikes in Yemen in response to Houthi rebel attacks on ships in the Red Sea. The UK government is concerned about potential disruptions to cargo traffic and the economy. While the attacks pose a threat, analysts suggest that current energy prices are still lower than they were a few months ago. Deviations in shipping routes and increased shipping costs have impacted global trade, affecting various industries. The attacks highlight the vulnerability of key trade routes and the interconnectedness of the global economy.