lobal shipping is such a complicated, carefully calibrated system that disruptions in one area of the world have ripple effects everywhere else. The world has seen this happen with the COVID-19 pandemic, where port slowdowns and closures in Asia have led to rising prices and inflation in North America and Europe.
Russia’s invasion of Ukraine promises to disrupt global shipping even further. The shipping industry as it exists today is very new in historical terms. Since World War Two, the world has become ever more economically linked, and major military conflict will force the system to adapt in unpredictable ways.
Let’s take a look at how geopolitical unrest can affect global shipping, using the Russian invasion of Ukraine as an example.
Rising Energy Prices
The shipping industry depends on oil. Not only does it provide the fuel for large container ships, but oil tankers also comprise a significant portion of global trade. When oil prices rise, shipping prices rise. Vessels may have to be grounded for lack of fuel, increasing shipping times. These increased costs are often passed on to consumers.
Russia is one of the world’s top suppliers of oil and gas, and since the invasion, the rest of the world has imposed some of the strictest and most sweeping economic sanctions ever seen. The price of oil has spiked over $120 a barrel, approaching the all-time record set during the recession of 2008. Fuel tanker rates from Europe to the United States have jumped back to their pandemic highs last seen in May 2020. With President Biden announcing a ban on Russian oil and gas imports, prices will continue to increase in the US.
The world’s energy system will adjust in time. Russian oil normally accounts for only 8% of global supply. But there will be some short-term shocks as oil production ramps up elsewhere to compensate for these losses.
Areas Closed to Shipping
Geopolitical unrest often means that areas of the world are declared off-limits to shipping, or become so dangerous that companies prefer to avoid them and seek alternate routes. In extreme cases, if there is an active war zone and ships, planes, trains, and trucks have a high chance of being destroyed, trade can be cut off altogether. Treaty obligations may also come into play.
For example, Turkey has closed the Bosporus and Dardanelles Straits to Russian warships. The Straits are the only link between the Mediterranean and Black Seas, and thus vitally important for shipping. Russia had been using the Straits as a transit point for its warships, since the Black Sea borders both Ukraine and Russia. However, under the terms of the 1936 Montreux Convention, Turkey was granted the ability to restrict military traffic through the Straits. The fighting is also directly affecting civilian cargo ships traversing the Black Sea.
Important Materials and Commodities Under Threat
Political and military unrest also threatens global shipping by destroying or cutting off access to important goods. This can have unpredictable ripple effects, since some countries play outsized roles in the production of certain commodities.
Ukraine and Russia both provide materials critical to auto manufacturing, including palladium, platinum, steel, chrome, and aluminum. With Russia cut off from world markets and much Ukrainian production ceasing altogether, companies are feeling the strain. Volkswagen and BMW are already curtailing production at their German factories.
Also, Russia and Ukraine together account for nearly a quarter of global wheat exports, which is used to make food items from bread to potato chips. Some countries, like Egypt and Turkey, import more than 70% of their wheat from Ukraine or Russia. With these supplies cut off, and some farms in Ukraine being directly destroyed by warfare, a surge in food prices is a likely result.
The System Can Adapt, But It Takes Time
The global shipping system is resilient, and as we’ve seen over the past few years, it can absorb shocks from a global pandemic. But those shocks are felt in the form of higher prices, most of which have not fallen back to their pre-pandemic levels. Ocean shipping rates have already been at all-time highs thanks to COVID-19, and they are likely to increase further.
Commerce flourishes in peacetime and binds nations together, making war less likely. When war does break out, close economic ties between nations make the cost of maintaining the conflict even higher. When it comes to both global shipping and the saving of lives, peace is always preferable.