A giant cargo ship is blocking Egypt’s Suez Canal, here’s how this will affect the global economy

On Tuesday, the Suez Canal was blocked after a 400-meter-long container ship ran aground. The MV Ever Given, which was sailing under a Panama flag, got stuck in the waterway during high winds, its operators said.

The vessel was en route to the port of Rotterdam in the Netherlands when it got stuck. The canal, which is in Egypt, connects the Mediterranean with the Red Sea and provides the shortest sea link between Asia and the Middle East, and Europe.

Also, 12% of the global trade passes through the Suez Canal, which is often described as the artery of world trade. The canal allows for more direct trading between Asia and Europe, cutting off the need to circumnavigate Africa and reducing voyage time.

The vessel, which is about the size of four football fields, has blocked the path of other vessels, bringing traffic to a standstill. According to research firm StoneX, more than 150 vessels are waiting to pass through the Canal and it could take more than a week to clear the backlog if the situation is resolved.

How is the vessel blockage affecting the global economy?

Each day, an average of 50 vessels passes through the Canal and it is significant for oil and liquefied natural gas shipment from the Middle East to Europe. And each day of blockage disrupts more than $9 billion worth of goods, the Associated Press reports, citing shipping journal Lloyd.

CNBC also reports that oil prices went up by 6% due to the blockage. This is likely to affect economies in Africa and other developing countries that largely import finish crude products.

Also, COVID-19 has affected supply chains, resulting in price hikes of goods across the world. The blockage will exacerbate the situation, according to CNBC.

“While it remains premature to assess the full impacts arising from the incident, our channel checks indicate within the near term, the blockage is likely to add to industry supply strains, which are already hampered by ongoing supply chain bottlenecks (port congestion and vessel/container shortages) caused by COVID-19 as liners re-route current voyages to alternative routes which will result in longer voyage times and causing further delays,” CNBC cited a JPMorgan note to clients.

The shipping delay could lead to an increase in the prices of goods such as electronics, clothes, shoes, food, and energy supplies, among others.

JPMorgan strategist Marko Kolanovic Thursday added that: “In this scenario, the canal would be blocked for an extended period of time, which could result in significant disruptions to global trade, skyrocketing shipping rates, further increase of energy commodities, and an uptick in global inflation.”

On the impact of the canal blockage on energy products, the president of Houston-based energy investment firm Henrietta Resources, Peter Sutherland, said any price effect will likely be brief.

“It won’t have a lasting impact on prices, but it will help lend support in the run-up to the OPEC+ meeting,” Sutherland told CNBC. “The risk premium in oil markets will likely be short-lived, but the canal back-up still managed to shift the market narrative.”