What the US attack in Yemen means for oil prices, inflation

A wider escalation could drive up the price of oil and many consumer goods.

January 12, 2024, 1:41 PM

U.S. airstrikes against Houthi targets in Yemen on Thursday night escalated an ongoing conflict over a shipping route that holds significant implications for oil prices and inflation.

The military operation, undertaken in partnership with the United Kingdom, came in response to a monthslong series of attacks carried out by Iran-backed Houthi rebels on freight ships in the Red Sea.

Houthi Defense Minister Mohammed Nasser Al-Atefi said in a statement on Wednesday that the group would respond to the attack carried out by the U.S. and U.K.

The U.S. attack could cause a spike in oil prices and inflation if it sets off a wider escalation of the Israel-Gaza war, deepening supply chain woes and fueling price increases for many essential goods, analysts told ABC News. Oil prices surged 3% in early trading on Friday partly due to fear of such a scenario, they added.

The immediate impact of the attack appears notable but limited, analysts said, since many of the major shipping companies had already diverted their routes in response to the threat posed by the Houthis, analysts said.

"The absolute worst case scenario from a supply chain standpoint is if this escalates into a shooting war between the U.S. and Iran," Jason Miller, a professor of supply-chain management at Michigan State University, told ABC News. "It would result in a massive increase in energy prices and if oil goes up, everything goes up."

"Right now most carriers had already decided to reroute around the Red Sea, so this doesn't change the dynamic there too much," Miller added.

Since October, Houthi militias have launched over 100 attacks targeting at least 10 merchant vessels, according to a statement last month from the Pentagon.

The Houthis have targeted commercial ships traveling through the Red Sea as they approach the Suez Canal, which the U.S. Naval Institute says facilitates roughly 12% of global shipping traffic.

Major shipping companies MSC, Maersk and Hapag-Lloyd, as well as British oil giant BP, previously responded to the attacks by diverting their ships to alternative routes.

Freight rerouted from the Suez Canal typically travels around the southern tip of Africa, extending the length of the trip by roughly 30%, Jason Miller, a professor of supply-chain management at Michigan State University, told ABC News.

The increased travel time has strained the supply of ships, since longer routes mean fewer ships are available to carry goods at any given time, Miller said. That bottleneck, he added, has driven up short-term rates known as spot prices, which companies negotiate for the transport of their goods.

PHOTO: An RAF Typhoon aircraft takes off to join the coalition from RAF Akrotiri to conduct air strikes against military targets in Yemen, Jan. 12, 2024.
An RAF Typhoon aircraft takes off to join the coalition from RAF Akrotiri to conduct air strikes against military targets in Yemen, Jan. 12, 2024.
Uk Mod/via Reuters

Prices stand at roughly $6,000 for a 40-foot container ship, up from $2,000 a year ago, according to a recent report from S&P Global Commodity Insights.

While small businesses will likely bear higher import costs resulting from the jump in spot prices, large retailers like Walmart and Home Depot would not be significantly impacted because their shipping costs are dictated by previously established contracts, Miller said.

The U.S. attack on Yemen could expand the number of ships diverting from the Suez Canal, since insurance companies will be reluctant to cover damage incurred by a possible attack, Christopher Tang, a professor at the UCLA Anderson School of Management, who focuses on supply chains, told ABC News.

Oil tankers, especially, may want to avoid the risk of environmental disaster and worker injury, Tang added.

"The risk is just too high," Tang said.

The crisis in the Red Sea is likely to have a marked effect on consumer prices in Europe but could also increase prices for a range of U.S. consumer products imported from countries in Southeast Asia, such as India and Vietnam, since those goods travel through the Suez Canal, some analysts said.

Still, some experts cautioned that the trade disruption so far could ultimately have little or no effect on U.S. prices, since shipping fees contribute a fraction of the costs related to a typical item.

An escalation of the Middle East conflict, however, would dramatically amplify the effect on oil prices and inflation, analysts said.

"That would be a mess," Rob Handfield, a professor of operations and supply chain management at North Carolina State University, told ABC News.

In the event, for example, of a potential outcome that puts Israel in direct conflict with Iran, a major oil producer, the resulting price shock would make it more expensive to operate factories and transport goods. A wide array of consumer prices, in turn, would jump.

"If it escalates further, it would be a disaster," said Tang, of UCLA.