Marc Cuniberti So far, the Israeli war has had little effect on inflation here in the U.S. That could change in a big way.
In response to the continued military incursions into Gaza, the pirating and attacking of ships has increased along the most common route which is used to bring oil to the civilized world.
This route begins in the Persian Gulf, and then passes through a narrow passage called the Strait of Hormuz, onward to the Gulf of Oman and then to the Arabian Sea. It then continues into the Gulf of Aden, where it transverses through an even narrower passage, the Bab Al-Mandeb Strait which leads into the Red Sea. The route eventually ends up at the ever-important Suez Canal which gives access to the Mediterranean Sea and the rest of the civilized world.
The only other route, should this particular series of waterways become impassable for whatever the reason, is around the Cape of Good Hope otherwise known as the proverbial “Around the Horn of Africa”.
With the increase in hijacking and the threat of attacks from pirates, rockets and drones, shipping companies are on high alert as well as the U.S. military, which is attempting to keep the shipping lanes open.
Enter the Bab Al-Mandeb Strait, a narrow passage not unlike the Strait of Hormuz but much smaller located between the Gulf of Aden and the Red Sea. Not only is the threat of piracy increasing the chances that shippers will suffer losses, should a ship be sunk in the middle of the Bab Al-Mandeb Strait and render it impassable, the route around the African horn will be the only alternative. Using this route adds weeks to the travel time, which increases costs dramatically.
But the damage hardly stops there.
Longer trip time means fewer trips in total as each ship is tied up for a longer period of time. Supply lines will be delayed as spare parts, oil and whatever else needs to be transported, sit in a ship’s hull for a longer period of time using the alternate route.
Insurance costs are already increasing due to piracy concerns. Other costs such as fuel and maintenance costs as well as manpower costs would continue to rise due to the longer travel time and the treacherous seas the horn is noted for.
Preemptive price increases in goods will also be seen as suppliers see rising costs along many facets of the supply line.
Product shortages due to the lack of spare parts, the lack of timely deliveries and the need to increase stocking inventory to address such problems also will spike costs while shortages will pull prices up because of the law of supply and demand.
Needless to say the price of oil will spike. Since oil is used in a vast majority of stuff that the world needs, when oil prices rise, so goes the price of many of the things we buy.
Perishable goods will be also impacted as more time at sea increases equipment costs and the energy required to keep foods fresh over a longer time period.
Additionally, in a world where supply lines are just beginning to normalize post CoVid, a major rerouting of oil and other goods may slow the recovery from the shutdowns. It could possibly even slam the progress in reverse, dragging us back to the problems witnessed when CoVid ended and store shelves were slow to fill.
You and I are not the only ones to put two and two together and surmise the damage an impassable Strait of Hormuz or Bab Al-Mandeb would cause to the Western world and beyond.
Many of the pirate groups, the Iraqi State, Hamas and other haters of Israel and America currently possess the weaponry to sink a ship large enough to cause a major problem in the narrow waterways in either or both of these two straits.
If not sink a vessel altogether, just the ongoing harassment and/or outright piracy could bring the shippers of the world to their knees through the increase in costs as a result of such actions. These costs will likely be passed onto the consumer in many of the products we buy causing even higher inflation then what we see now.
While the governments of the world try to rein in inflation through tighter monetary and fiscal policy, a handful of determined terrorists standing on a bluff overlooking the sea armed with some rockets could bring the Western world to their knees through the resulting inflation that would result from sinking just the right ship in just the right spot.
“Watching the markets so you don’t have to“
This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, and California Insurance License #0L34249 His insurance agency is BAP INC. insurance services. Email: [email protected]
