SAFE’s latest Issue Brief examines the current political unrest and violence in the Republic of Yemen and its implications for the broader global oil market.
Since Saudi Arabia began airstrikes on Houthi rebel targets in Yemen in late March, more than 1,800 people have been killed. As a reaction to the airstrikes, oil prices jumped approximately 5 percent, indicative of the fragility of today’s oil prices and prompted by concerns that escalation could lead to more widespread conflict, threatening the flow of crude oil supplies.
Should conflict in Yemen continue and threaten the safety of oil shipments through the Bab el-Mandeb strait, SAFE analysis finds that the rerouting of oil tankers around the southern tip of Africa could add at least $3 to $4 per barrel to the shipping cost of oil and an additional ten days of transit time. Meanwhile, should the strait close completely, oil prices are estimated to increase by approximately $10.
Key findings from the report include:
Since Saudi Arabia began airstrikes on Houthi rebel targets in Yemen in late March 2015, more than 1,800 people have been killed—at least 825 of them civilians—in a conflict intended to roll back the progress of the Shia-led rebellion. While the operation has created some operational space for the Houthis’ opponents in Southern Yemen and disabled Houthi long-range missile capabilities that threatened Saudi Arabia, it has so far fallen short of its apparent goal of dislodging the Houthis from major cities.
Yemen’s oil production today only accounts for approximately 0.1 percent of global output, yet the country holds a strategically important location adjacent the Bab el-Mandeb strait, one of the world’s most important oil transit chokepoints through which nearly 5 million barrels of oil per day traveled last year.
Saudi Arabia has been joined by Sunni allies, against the Iran-backed Houthi rebels that they believe to be an Iranian proxy, resulting in the conflict being seen to some extent as yet another flashpoint in a regional battle for influence between Riyadh and Tehran.
When airstrikes began, oil prices jumped approximately 5 percent as prompted in part by concern that the escalation could foment even wider conflict in the Middle East that would threaten crude oil supplies to the global marketplace.
If conflict were to make shipping through the Bab el-Mandeb too dangerous, oil tankers would be forced to alter their routes and travel around the southern tip of Africa, adding at least $3 to $4 per barrel to the shipping cost of oil and ten days of additional transit time, while also elevating the risk premium on global oil prices, with analysts estimating potential price increases of $10 per barrel if the strait were closed.
Yemen holds proved oil reserves of approximately 3 billion barrels. If more enduring degrees of political stability and governance could be achieved, the country would likely see currently offline oil supplies return and an uptick in new energy investments.
Developments in Yemen represent just the latest example of uncertainty and volatility in a global oil market with potential implications for U.S. naval activities, foreign policy, and, through possible oil price spikes, the economy.