How Global Shipping Tensions Are Inflating Energy Bills

RealClearMarkets

For months, Houthi rebels have attacked marine traffic in the Red Sea – and more recently in the Indian Ocean – in protest of Israel’s conflict with Hamas in Gaza. The Houthis argue that they are targeting Israeli-owned ships or those that are bringing goods into Israel, although non-Israel affiliated ships have been attacked as well. The threat has increased shipping rates, as some maritime traffic has moved away from the Red Sea and is traveling the longer route around Africa to avoid potential confrontation with Houthi rebels, using more fuel for the longer route and taking more time to complete their voyage.

In fact, as much as 15% of global maritime traffic has been affected by the Houthi activity, including significant movement of crude oil, which puts upward pressure on global oil prices, as more fuel and time is needed to travel around Africa as an alternate route.

The Houthi activity demonstrates a factor often overlooked by casual observers of the oil and gas industry. Price for oil and gas (and for that matter all products) are impacted not only by the cost to produce the product, but by the ability to bring the product to market.

The transportation of oil, petroleum products and natural gas is especially important in regards to energy prices. Referred to as the “midstream segment” within the oil and natural gas industry, transportation (including pipelines, ships and rail cars) is often overlooked when discussing impacts on consumer price.

As an example, anticipating a potential refined product export ban from the administration in July 2022, the American Council for Capital Formation (ACCF) released a study on the price impacts of such a ban. Our analysis found that a ban on U.S. refined product exports would likely lead to price hikes on both east and west coasts, as there would be inadequate infrastructure (pipelines and Jones Act-compliant vessels) to bring products to products to the markets where they would be needed. While there would be some price reductions in areas near the refinery centers, the overall impact for the country would be a net increase in product price. Further, without the ability to export products, refinery throughput would decrease, along with domestic crude production (and U.S. jobs, economic activity and domestic energy security).

Another ACCF-sponsored study released in May 2023 also found that transportation infrastructure for oil and gas has a significant impact on price. The study found that restricting exports of natural gas would have very little impact on domestic gas price. However, the ability to move natural gas throughout the continental U.S. could have a significant impact on lowering costs. In fact, the study estimated that domestic gas price could decrease by as much as 40 cents per MBtu with improved pipeline infrastructure.

Clearly, the midstream segment is an important factor in the energy prices consumers pay. Whether on sea or land, security and adequate capacity of transportation infrastructure is essential to ensure reasonable cost to energy consumers.