The Impact of Russo-Ukrainian and Israel-Hamas Wars on Trade
Dual Conflicts Lead to Rise in Shipping Rates
International trade remains strong despite instability in Eastern Europe and the Middle East. While consumers are seeing few delays in shipments, they are not immune to rising costs due to increased uncertainty and rising insurance premiums.
All five ports in Israel have heightened security alerts, with the ports of Ashdod and Ashkelon closest to Gaza receiving the most attention. Routes serving Haifa, Israel’s largest port, remain largely unaffected. In fact, spot rates for ocean shipping have fallen since Hamas’ initial attack on October 7. However, costs for sending cargo into Israel via air have increased.
Israel and Ukraine are both home to important ports, but limited trade on the Black Sea and into Israel is capping the global effect of these protracted military conflicts. 20 million tons of cargo pass through Haifa Port annually compared to 90 million tons of cargo that pass through the Port of Long Beach in Southern California. In total, 0.4% of global goods travel through Israel.
How Is International Trade Impacted?
The effect on the bottom line varies greatly by shipping sector. The three major U.S. courier companies, FedEx, UPS and DHL Express are still operating in Tel Aviv and Israel, with only UPS issuing an official statement that they have temporarily suspended operations in southern Israel. Container ships are hardly affected, whereas crude oil and natural gas are seeing a more immediate impact.
Breaking it down into simple terms: energy prices are rising, leaving air cargo in a vulnerable position, on top of the security concerns for air travel.
“The major fear,” according to Edward Hardy of Air Cargo Week, “is that the conflict could lead to a similar situation to that of 50 years ago, when the Yom Kippur War sparked an unprecedented global oil crisis that lasted for months.” The average price for a barrel of crude oil has jumped $20 since July, hovering at $92 at the time of writing. A perfect storm of oil prices could be brewing, as we noted last year following Russia’s invasion of Ukraine. Saudi Arabia was voluntarily cutting their oil production even before Hamas’ October 7 attack.
Status of the Suez Canal
There are questions on everyone’s mind, but few linger larger for international trade than the status of the Suez Canal. The 120-mile long waterway connects the Mediterranean Sea to the Red Sea, essentially Europe to the Middle East. The Suez Canal is also in the unique position where, as integral as it is to global commerce, the less you hear about it, the better.
Egypt fully controls the Suez Canal and, at the moment, it would be unlikely for service to be stopped. The Egyptian border has been in many discussions, culminating when it briefly opened to bring in humanitarian aid to Gaza on October 21. While all parties have little interest in closing the canal at the moment, there is precedence for disruption. In 1956, Israel, France and the United Kingdom invaded Egypt following the nationalization of the Suez Canal Company, leading to the canal being closed for five months. The Suez Canal would be closed again from 1967-1975 in response to Israel’s incursion into Egypt during the Six-Day War.
Any stoppage in the Suez Canal would have a major effect on oil prices. 9% of global seaborne crude travels through the canal. Vessels have the option to travel around the southern tip of Africa, but this would raise costs and extend timelines.
Will the Israel-Hamas War Increase Inflation?
In an effort to combat inflation, the Federal Reserve System has been feeding Americans a steady diet of increased interest rates. Mortgage rates cracked 8% this month and former Walmart CEO Bill Simon warns that “for the first time in a long time, there’s a reason for the consumer to pause.”
While there is optimism to be had for the United States economy, including historically low unemployment, President Biden has asked for $105 billion of support for Israel, Ukraine and the border. Add in the inability of the House of Representatives to select a new speaker and the November 17 drop dead date for a government shutdown is uncomfortably close.
There are specific sectors that will see little change to their bottom line and some that will even find an increase during Q4. The majority of Q4 products have been delivered and are waiting in domestic warehouses for holiday shoppers. Unfortunately, the onset of a new war in the Middle East is leading Americans to be even more cautious about their spending when they were already conditioned for a holiday season of belt tightening.
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