Shipping disruptions within the Strait of Hormuz are shedding a light on the interconnectedness of the global economy
Texas A&M University at Galveston’s Dr. Jean-Paul Rodrigue offers advice for consumers feeling a budget pinch due to rising costs
Jean-Paul Rodrigue, Ph.D., Professor, Department of Maritime Business Administration, Texas A&M University at Galveston, Distinguished Fellow, Hagler Institute for Advanced Study, Texas A&M University
Much of the world’s economy is driven by goods that are shipped across waterways on ships. From gasoline in cars, to groceries on the shelf, it can be safely said that everything people consume is tied in one way or another to the fossil fuel industry.
It might seem strange to a consumer sitting in North America to think that a shipping disruption half a world away would impact their daily lives. However, thanks to the interconnected nature of the global economy surrounding fossil fuels especially, any disruption is bound to send ripples across the globe like a pebble dropped in a stream.
Instead of ripples though, the near‑total halt of commercial traffic through the Strait of Hormuz is producing waves in the form of extreme port congestion and rising energy costs. Thousands of vessels are either stuck inside the Persian Gulf or anchored outside the Strait of Hormuz waiting for safe passage. Backlogs exceed 400 vessels in the Gulf of Oman and traffic through Hormuz has dropped ~90%, from ~138 vessels/day to near zero.
“The significance of the Strait of Hormuz to the global economy is strategically important. The Strait of Hormuz is linked with two important supply chains. The first one is the energy supply chain, and the second one is the container supply chain. And in both cases, they were significantly disrupted by the recent events taking place,” said Jean-Paul Rodrigue, Ph.D., professor, Department of Maritime Business Administration, Texas A&M University-Galveston, Distinguished Fellow, Hagler Institute for Advanced Study, Texas A&M University. “With the energy sector, we’re talking about petroleum, we talk about natural gas, for which the Strait of Hormuz accounts for roughly 20% of the international trade. And for containers, we’re talking about major hubs such as Dubai, where you have a large amount of commercial cargo, which is transited between East Asia, South Asia, the East Coast of Africa, the Middle East and Europe.”
In response to uncertainty about safe passage through the Strait, major global carriers including Maersk, MSC, CMA CGM, COSCO, and Evergreen have suspended Gulf services or invoked force majeure, forcing widespread rerouting.
With so much uncertainty and anxiety with rising costs at the gas pump and everyday items, American consumers might be feeling a bit of Déjà vu to the time of the global disruptions caused by the Covid-19 pandemic.
While stocking up on toilet paper might have created a sense of order during a chaotic time during COVID-19, Dr. Rodrigue notes that stocking up on gasoline is a bit more difficult for the average consumer.
“Most consumers buy their goods when they need them, and therefore you cannot ask a general consumer to stock up on gasoline. So, it’s very difficult to do anything to be prepared for an event like this,” Dr. Rodrigue said. “We’re going to see price increases, but no scarcity because most of the supply chain involved with to Strait of Hormuz are not directly linked to a significant extent to the commerce of the United States.”
While no instance of supply chain unrest is the same, Dr. Rodrigue has a wealth of knowledge to pull from when looking at the current disruption in the Persian Gulf region, and particularly the Strait of Hormuz.
“At Texas A&M in the Department of Maritime Business Administration, this is a lot of what we do. We look at international trade; we look at the importance of ports and the importance of maritime shipping. I’ve been writing about this in my own research for the last 30 years,” Dr. Rodrigue said. “We’ve been writing about that for decades. So, what is happening right now is no surprise. It is a scenario that has been anticipated. You could say war-gamed, if you wish, for quite a long period of time. Again, there is no surprise. The scenario, this response from Iran was always considered and anticipated and what right now is taking place is how do we respond effectively to mitigate the situation as quickly as possible.”
While the current situation was predicted by scholars, front of mind for the everyday consumer is when might energy costs return to a more nominal level. Unfortunately, it will not be as simple as turning a faucet back on to restore the flow of energy products.
“Let’s imagine the current scenario where if things were to come back to normal by the end of this month, it would take roughly two or three weeks for this entanglement to untangle itself and things to return to normal, but prices tend to be sticky” Dr. Rodrigue said. “They (prices) reflect capacity issues and shortages. That would take a fair amount of time to slow down. I would say for the energy sector it will be longer, for other sectors it could be much shorter. But at this point, from a price point of view, the damage has been done.”
