Strait talk: Why the oil crisis is getting worse

0:01NPR.

0:08Welcome to Straight Talk, where we break down what's happening in the world's most important trade chokepoints and strategic seaways. Straight Talk's so serious, Patti. 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. 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.

0:50That was economist Rachel Ziemba. This is The Indicator from Planet Money. I'm Paddy Hirsch. And I'm Ricky Mulvey. On today's show, the Bab el-Mendeb Straight. 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. This message comes from Viking, committed to exploring the world in comfort. Journey through the heart of Europe on an elegant Viking longship, with thoughtful service, destination-focused dining, and cultural enrichment on board and on shore. And every Viking voyage is all-inclusive with no children and no casinos.

1:30Discover more at Viking.com. This message comes from NPR sponsor Charles Schwab with its original podcast on investing. Each week, you'll get thoughtful, in-depth analysis of both the stock and the bond markets. Listen today and subscribe at schwab.com slash oninvesting or wherever you get your podcasts. Support for this podcast and the following message come from Rula. With RULA, finding a therapist and getting the help you need is easier than talking yourself out of it. Because RULA offers personalized cost estimates and has no hidden fees. With sessions costing an average of$15 and over 120 insurance plans accepted nationwide.

2:11If you're ready to stop talking yourself out of finding care and making progress, head to RULA.com. That's R-U-L-A dot com and take the first step. 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 gas. At the top end of the Red Sea, you've got Egypt and the Suez Canal, which leads to the Mediterranean.

2:52And 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 Strait of Bab-a-Mendeb. Until recently, the Yemeni government had been controlling some of that area. Rachel Ziemba covers global political and economic risk at the Center for a New American Security. Now we have a circumstance where the Houthis, whom 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 2014.

3:38They're allied with Iran, some call them a proxy, and they're fiercely opposed to Israel's existence and 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 Houthis 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 Bab al-Mandeb Strait, Barim Island, what the military calls key terrain because it dominates the strait, which is only about 18 miles wide at its narrowest point.

4:24Whoever 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 Bariim 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 and the Bab al-Mandeb Strait as an alternative oil shipping route after Iran closed the Strait of Hormuz more than six months ago. Last week, the Saudis' pipeline to the Red Sea was attacked by drones.

5:03Then this week, the Saudis suspended oil shipments from a Red Sea port. 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 al-Mendib Strait 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 Strait. Who came up with that?

5:43That 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, 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 Babel Mendeb 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.

6:32It's also happening at a time where there is significant outages of refineries, which are meaning not only does the crude oil price go up, 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.

7:16Sulfur 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 medical devices. Helium is also a byproduct of natural gas deposits. Now, the US 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.

8:00There may be U.S. producers who benefit from shortages, but the American consumer tends to suffer in these contexts. Rachel says it's not just price hikes we should be worried about. The knock-on effects of the Houthis' 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 role 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 and key to developing an onshoring production here.

8:43From 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 Bab al-Mandeb 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 Houthis at this second strategic and highly vulnerable strait shows just how fragile and unsustainable such workarounds really are. Now that's what I call straight talk, Paddy. Would you say dire straights, Ricky? Oh, do they want money for nothing?

9:20This episode was produced by Julia Ritchie with engineering by An Lee Huang. It was fact-checked by Sierra Juarez. Kate Kincannon edits the show. The Indicator is a production of NPR. are.

9:35Next week on Straight Talk, five ways to kill time while your ship waits for a military escort. We'll see you next week. This message comes from Capella University. You know that feeling when there's a spark building inside you, that you were meant for more? That's your own drive pushing you towards what's next. Capella University gets that. With their FlexPath learning format, you can set the pace and earn your degree without putting life on pause. You've built experience and know what you're capable of. Now, this is your time to turn that momentum into more. The only real question is, what can't you do?

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