Red Sea Tensions Forcing Business to Rethink Energy Strategy

Thursday, 18 January 2024

In the context of the recent upheaval in the Red Sea, it is imperative for businesses, particularly those in the energy and shipping sectors, to re-evaluate their energy strategies. The turmoil in the Red Sea has led to significant disruptions in shipping routes, with major implications for global trade and energy security. This situation necessitates a strategic approach to energy management and procurement.

?The Red Sea, a crucial maritime chokepoint, has been impacted by the escalating conflict involving Yemen's Houthi rebels. These developments have led to heightened security concerns, causing some of the world's largest shipping companies to suspend movements through this vital route. Approximately 12% of seaborne oil trade and 8% of liquefied natural gas (LNG) pass through the Bab Al Mandeb strait at the southern end of the Red Sea. The disruption in this region poses a substantial threat to global energy security and trade.

?In response to these challenges, businesses are advised to explore energy optimisation technologies and strategies to reduce consumption. This could include assessing and implementing more efficient practices and equipment to enhance sustainability and operational efficiency. Another crucial aspect is the consideration of flexible procurement methods or longer-term energy contracts. Such approaches can help businesses mitigate exposure to fluctuations in wholesale energy prices, which are likely to be affected by these disruptions.

The current situation also highlights the importance of diversifying energy sources and supply chains. With the increasing reliance on imports from the Gulf Cooperation Council (GCC) countries, particularly for Europe, the unrest in the Red Sea can have far-reaching implications. Moreover, the higher insurance rates and the potential rerouting of ships around Africa instead of using the Red Sea and Suez Canal will incur additional costs and logistical challenges.

Furthermore, the environmental impact of these disruptions cannot be ignored. Rerouting around the Cape of Good Hope, for instance, not only extends transit times but also increases fuel consumption, contributing to a larger carbon footprint for the shipping industry. This is particularly pertinent in light of the EU's inclusion of maritime emissions in its Emissions Trading System (ETS).

In summary, the ongoing unrest in the Red Sea necessitates a comprehensive reassessment of energy strategies for businesses, especially those dependent on maritime trade routes. This includes exploring alternative energy sources, optimising energy use, securing flexible and longer-term contracts, and considering the environmental impact of operational changes.

Sources: The National News, Atlantic Council.