GLOBAL ECONOMY
Intro: As energy and food prices soar, we face a winter of global discontent facilitated by the West being run by failures of truly historic proportions
Houthi rebel forces have swept down the western coast of Yemen, seizing the strategic Red Sea port of Mokha (long renowned for its global coffee trade) then Dhubab, another port, before taking Perim Island at the mouth of the narrow Bab al-Mandab Strait that connects the southern end of the Red Sea to the Indian Ocean.
Many will say these are far off places of which we know nothing and care even less.
Perhaps. But what has just happened there is about to hit us even harder at the petrol and diesel pumps, the supermarket checkout counter, in monthly mortgage payments, bank loans, and household food and energy bills. Bab al-Mandab is Arabic for “The Gate of Grief” – and grief is what the global economy is in for this winter.
Oil and gas prices have already soared since Donald Trump’s war on Iran resulting in Tehran seizing control of the Strait of Hormuz, a development the President managed somehow not to foresee.
Since then the US Navy has been deployed to wrestle back control, with mixed results.
Before Trump attacked Iran, around 25 per cent of global seaborne oil trade passed through the Strait of Hormuz and 20 per cent of global liquified natural gas (LNG). Oil flows are now less than half of that (perhaps no more than a third) and almost no LNG at all is getting out.
It’s hardly surprising, then, that oil and gas prices have soared. But nothing like the trebling and quadrupling of prices in previous energy crunches: that’s because several workarounds were instigated, none more important than the East-West pipeline from Saudi Arabia’s oil field heartlands to the oil port of Yanbu on the Red Sea.
The Saudis built this 750-mile pipeline in the 1980s, as the Iran-Iraq war was raging, precisely as a contingency for the Strait of Hormuz being shut. This year it became the most important piece of energy infrastructure in the world, its daily capacity of 7 million barrels doing its bit to mitigate the rise in oil prices.
No longer. Which brings us back to the Houthis.
Just as the Islamic Revolutionary Guard Corps (IRGC) threatened all vessels trying to transit the Strait of Hormuz, so the Houthis, Shia insurgents funded and armed by the IRGC, now threaten all shipping attempting to pass through the southern exit of the Red Sea.
The two most crucial maritime chokepoints in the world are now under the thumb of a hardline Iranian regime and a proxy doing its bidding. It would be hard to think of a more disastrous outcome from Trump’s war on Iran. But there’s worse.
As the Houthis pushed south to take control of Bab al-Mandab, the Saudi East-West pipeline came under attack from drones dispatched by Iraqi Shia militia, yet more Iranian proxies.
Even the dim-witted can surely see a pattern here.
The drones took out pumping stations, forcing the Saudis to close the pipeline for at least six weeks for repairs. This has crippled Saudi oil exports in the process, a harbinger of the global spike in oil prices to come.
This week the benchmark Brent crude oil price hit almost $110, the highest since May, before falling back a bit. Aramco, the Saudi national oil giant, told European refineries there would be no deliveries next month. The prices of what’s refined from crude oil – jet fuel, petrol, diesel – are rising fast.
Tehran has, in effect, opened a second front in its war with America, with huge consequences for the global economy – and Trump, still struggling to escape from the first front (which he started), has no idea what to do about it.
The Saudi crown prince, Mohammed bin Salman, has pleaded with the US President for military help to repel the Houthis. Washington will likely be reluctant to assist, mindful that the Houthis survived a massive US bombing campaign, lasting over 50 days and involving 1,000 airstrikes, in the spring of 2025.
The Saudis are certainly in no position to dislodge the Houthis on their own. The group already controls a big chunk of northern Yemen, including the capital, Sanaa, despite previous Saudi military interventions on behalf of the beleaguered Yemeni government.
Now that the Houthis have their foot on the Saudi oil-export windpipe, they are going nowhere fast.
TWO
Sometimes it really doesn’t rain but it pours. The coming global energy crunch will be compounded by the fact that Ukrainian drones have taken out a third of Russian diesel-refining capacity. Russia is now having to import diesel from India, pushing up global prices even further.
Russia is retaliating by sending its drones to hit Ukrainian grain infrastructure and exports going through the Black Sea, seriously hindering the amount of grain getting out from one of the world’s great bread baskets.
It’s a prelude to the soaring food prices to come. Farm machinery is powered by diesel. So that cost is rising. So is the cost of fertiliser. Around 20 per cent of global supply used to come through the Strait of Hormuz. Not now. The upward pressure on food prices will become relentless.
Suddenly we’re looking at the prospect of soaring energy and food prices, as oil and grain markets buckle. A new broad-based inflationary surge is coming down the pike.
The Bloomberg commodity index has already risen by 48 per cent this year. That’s now working its way into consumer prices.
UK inflation is back over 3 per cent – with more rises to come. European gas reserves are at historic lows, with time running out to replenish them for winter. So, gas is about to become much more expensive, too.
OFGEM’s energy price cap is forecast to rise by as much as 25 per cent in January.
We are now moving into a world of higher interest rates. The European Central Bank increased its benchmark rate last week; the US Federal Reserve did the same just days ago. The Bank of England kept its rate on hold. But it’s only a matter of time before it starts raising rates too. Now that inflation is back, it will have no other choice.
We are looking at higher interest rates for as far as the eye can see. The chance of reviving the housing market is non-existent. While all this unfolds, politicians on both sides of the Atlantic debate and promise irrelevancies while ignoring what really matters.
Britain has been consumed by rows over political donations which in the grand scheme of things barely matter a jot, but allow politicians to posture at their hypocritical worst.
America has a President – who’s caused much of the global economy’s turmoil – trying to bribe voters with a $5,000-a-head “dividend”. France has a lame-duck President who talks a lot and does nothing as his country sinks into a fiscal morass.
German Chancellor Friedrich Merz might not survive next week following a series of bad results in elections.
The markets, of course, know exactly what’s happening. Inflation is coming back with a vengeance, the war on Iran is being lost, and the global economy is at the mercy of Islamists bent on our destruction.
It should come as no surprise the bond vigilantes demand ever higher interest rates. A risky world means ever-rising risk premiums.
We face a winter of global discontent with a political leadership missing in action, obsessed with an agenda that means little and is of a self-serving discourse, wholly inadequate to the challenges about to confront us. When the IRGC and the Houthis hold the upper hand, nobody can be in any doubt we’re being run by failures of historic proportions.
