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Fossil Fuel Supplies Troubles – Looming Shipping And Energy Crisis

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A Vital Chokepoint

While the world had its attention dragged to Ukraine and Israel/Gaza, a new crisis that could upend international trade and energy supply is unfolding.

This new flashpoint is the southern end of the Red Sea, an area called the Bad El-Manded Strait. This very narrow waterway connects the Indian Ocean to the Red Sea, and thanks to the Suez Canal in Egypt, the Indian Ocean to the Mediterranean Sea.

Source: Wikipedia

Together with the Strait of Hormuz, these 3 spots make for the most strategic chokepoints on trade sea lanes in Eurasia.

30% of all global container traffic passes by the Suez Canal and the Bab el-Mandeb Strait. And most of the Middle East exports of oil & gas to Europe pass by the Red Sea as well, with the region holding 56% of the global oil reserves according to OPEC.

The growing issue is one of safety, with Yemen's rebel group, the Houthis, boarding cargo ships with helicopters and commandos, as well as firing missiles at civil and military ships.

Quick Escalation

The Houthis are a rather sophisticated armed group that has been fighting for almost a decade a gruesome war against a coalition led by Saudi Arabia. They are widely viewed as an Iranian “proxy”.  After the start of the Hamas-Israel War, the Houthis have fired missiles at Israel and seized Israeli ships.

They are now threatening every Western ship that passes by the region.

As a result, most major shipping companies have announced they will avoid the Red Sea and will do a major detour all around Africa instead. This will make the trip duration 1/3 longer and add 6,500 km. This will increase the demand for oil for shipping and cause a radical increase in shipping costs.

Source: BBC

In order to try to reopen the Red Sea for trade, the USA is building a coalition to help them in “Operation Prosperity Guardian“, looking to protect the trade route. Notably absent from this coalition are countries bordering the Red Sea, including Egypt, and major oil-producing countries like Saudi Arabia or the UAE.

This seems to indicate that while Middle Eastern countries are likely not happy to see a vital trade route disrupted, they are also wary of attacking the Houthis or appear to support Israel.

Concern about Houthis using their missiles to strike oil-producing facilities must have also played a role after the successful hit against Saudi installations in 2022, including refineries and power stations.

A Blow To Europe's Energy Supplies

Since the beginning of the war in Ukraine, Europe has increasingly switched its fossil fuel supplies from Russia to the Middle East. This was especially true for gas in the form of LNG (Liquefied Natural Gas), with several long-term contracts signed with Qatar by the Netherlands, Italy, France, and Germany.

In many ways, this highlights the vulnerability of relying on fossil fuel supplies, especially for countries without domestic production.

After years of warning about how Russia is using its energy production as a geopolitical weapon, it appears it can be used even by non-oil-producing countries as well, as long as they are in a position to threaten supplies one way or another.

Because of the highly centralized and unequal nature of fossil fuel deposits and production, this is probably something unavoidable.

Source: Wikipedia

Diplomatic Impasses

It is also somewhat ironic that all of this is unfolding while the Cop28 conference is being held in the United Arab Emirates (UAE). The international event has been described as a failure, as oil-producing countries have entirely refused the idea of adding a “phasing out of fossil fuel” in the final Cop28 declaration. Instead, it adopted the much more diffuse terminology of “Transitioning away from fossil fuels in energy systems.”, with the term transition implying a much slower and gradual process.

Middle-Eastern oil producers were also likely not in the mood for compromise with Western nations. The war in Israel has led to harsh criticism from Muslim countries. Iran, an OPEC member, is actively calling for an oil embargo like the one that devastated Western economies in the 1970s after the Yom Kippur War between Arab countries and Israel.

Climate Causing Extra Disruption

If the picture was not bleak enough, it just so happens that the Panama Canal, another vital trade route, is operating at just a fraction of its normal capacity.

This is due to an exceptional drought, which reduced the canal's capacity to get enough water to raise and lower ships. This caused a massive waiting line, with many ships waiting weeks or even months before getting a slot to cross toward the Pacific Ocean.

The insufficient rainfall has been linked to climate change, even by the IMF. More specifically, it was caused by the El Niño weather pattern.

This also impacts the global energy supply: most of US LNG is produced in the shale oil basin and turned into LNG on the Gulf of Mexico coast. It is then carried by an LNG carrier through the Panama Canal toward Asia.

LNG is a volatile fuel that re-gasifies under hot temperatures… like in a month-long waiting line in the tropical Panamanian sun.

As a result, in late November, many LNG carriers were re-routing toward the Suez Canal to reach Asia, with as much as half of the traffic previously passing by Panama having to find another route.

Half a month later, the Red Sea / Suez Canal is also closing.

Crises Convergence

It is maybe a perfect illustration of the fragility and interconnection of the global energy & trading system that we are witnessing such a convergence of crises all at once:

  • The disruption of fossil fuel supply is being used as a political weapon by Russia.
  • Tensions in the Middle East led to a call for a repeat of the 1970s oil embargo.
  • Trading route disruptions threaten the supply of energy to Europe, but also of goods produced in Asia.
  • Abnormal weather patterns forced US LNG to try to reach Asia through the Red Sea, only to discover this passage might also be impossible. And the same drought is reducing the trans-Pacific trade of goods as well.

A Boost To The Energy Transition

Despite the relative diplomatic failure of COP28, we can look at the 1970s as a template for the world's reaction to an energy crisis.

When oil prices went up severalfold after the oil embargo in 1973, virtually every developed nation's economy went into a recession. With the Eurozone PMI (Purchasing Managers' Index) at its lowest point in years, this is likely something already well underway.

It also triggered a mad rush to diversify energy supplies. In the 1970s, this translated into 2 directions that would ultimately solve:

  1. The exploration and discovery of new oil fields, notably the North Sea deposits and the “Alaska oil rush”.
  2. The quick expansion of nuclear power production in the US, UK, and Germany, and even more in France, which to this day produces up to 70% of its electricity with nuclear as a result of the 1970s energy crisis policies.

Exactly 50 years later, we can expect a similar reaction to diversify fossil fuel supplies from distant and potentially hostile regions.

The key difference between today and the 1970s is the rise of renewable energy as a viable alternative to oil & gas. Another one is new and safer innovative nuclear designs like SMR and thorium reactors.

So it is entirely possible that a new wave of exploration for oil and gas will occur, with prime candidates located in South America (Guyana, Suriname, Brazil, Uruguay, Argentina) and in Africa (Nigeria, Namibia, Angola, Mozambique, Sierra Leone).

But overall, we are likely to see more expansive oil & gas, as well as uncertain supply, accelerating the push for the energy transition. Combined with the trend of electrification of mobility and heating, this might prove positive for both renewable and nuclear energy production.

Jonathan is a former biochemist researcher who worked in genetic analysis and clinical trials. He is now a stock analyst and finance writer with a focus on innovation, market cycles and geopolitics in his publication 'The Eurasian Century".