Attacks on ships in the Red Sea continue to escalate. What started with narrow strikes by Yemeni-based Houthi militants against Israel-linked vessels has now expanded to ships carrying a wide range of freight, including oil and liquified natural gas. The US military has responded with strikes against Houthi targets, but so far they don't appear to have much of a deterring effect. Meanwhile shipping delays and costs — driven in part by anxious insurers — continue to worsen. To understand the challenge to global trade and how bad it could get, we speak with maritime historian Sal Mercogliano, a professor at Campbell University and the host of the
What Is Going On With Shipping?
show on YouTube. He discusses how shipping companies are making operational decisions in the area, how boat crews are coping, and how various international militaries are responding. He also talks about the broad history of the US Navy and its traditional role in securing international trading routes. This transcript has been lightly edited for clarity.
Key insights from the pod:
The scale of disruption in the Red Sea — 2:55
The evolution of the Houthi strategy — 4:06
How war risk insurance is assessed — 6:44
Who decides what route to take? — 8:47
Naval responses to recent Red Sea attacks — 11:14
What it’s like sailing through the Suez Canal right now — 13:55
Safety risk and crew compensation — 18:09
The jump in spot rates and the cost of shipping — 19:46
Commerce and the creation of the US Navy — 23:34
The risk of regionalization in shipping — 26:34
Piracy in the early 2000s — 28:33
The Indian naval response — 30:19
Challenges for the US Navy — 32:55
Resolutions to the Red Sea Attacks — 36:11
When the US will be impacted — 37:53
Books on naval history — 40:34
The role of the Jones Act — 41:46
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Joe Weisenthal: (00:10)
Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy Alloway: (00:15)
And I'm Tracy Alloway.
Joe: (00:16)
I think we have to talk more about the disruptions in the Red Sea. We sort of hit on them briefly with Craig Fuller a couple of weeks ago, but they've escalated, they're not going away. There's been a military response, but so far the tension and strikes continued ongoing and it's becoming a bigger issue.
Tracy: (00:35)
Yeah, I think there've been dozens of attacks at this point, and there have been people who are having to make hard decisions about whether or not to continue going through the Suez Canal, which is of course this waterway that is incredibly important for global trade. Just before we came on the show, I was reading a figure saying something like the Suez Canal handles 12 to 15% of global trade, at least in 2023. So when we say a chunk of global trade has been affected, we do actually mean a significant chunk.
Joe: (01:07)
A significant chunk. And we've all seen, I guess, those maps of ships being rerouted around the southern coast of Africa, the Horn of Africa. My understanding, I think there's been reports, [is] it started as just container ships, but it's been affecting other things. So it's starting to perhaps affect the oil trade and so forth.
And look, maybe the attacks will go away. Maybe they can be stopped, I don’t know. But I mean, I do think one, you know, it's pretty striking that a fairly small military group is able to create such a big disruption and there is no obvious solution from the biggest military power in the world, that being the US obviously.
Tracy: (01:47)
Right. And there is this overarching question of whether or not the US should be involved. And I think we're seeing some other governments, notably in Europe start to make more noise about this as well. So yes, there is a sort of political aspect to this as well.
Joe: (02:01)
Well, let's get right into it. We really do have the perfect guest. We are going to be speaking with Sal Mercogliano. He is a maritime historian at Campbell University. He is the host of the YouTube show, What’s Going On With Shipping? And sometimes he has been a tracker, Tracy, of your own furniture. The last time, I think the only time, we've spoken to him in the past, it was when your furniture was stuck. What was the ship? The Ever Forward?
Tracy: (02:29)
The one I think it was the Ever Forward, yeah.
Joe: (02:31)
When your furniture was stuck on the Ever Forward. I guess that was in 2021. We return to Sal, and now of course this is a much more severe disruption. We're going to have Sal back. So Sal, thank you so much for coming back on Odd Lots.
Sal Mercogliano: (02:44)
Thank you for having me.
Joe: (02:45)
Let's just start really big picture with how extraordinary and unusual is the scale of this disruption happening right now?
Sal: (02:55)
You're looking at about 11% of the world's trade goes through this vital maritime choke point, the Bab-el-Mandeb. This is the Gate of Tears, this is the very southern end of the Red Sea. This is the connection between Europe and Asia, but it's much more than that. You're looking at trade that goes not just between those two areas, but actually kind of like a hub and spoke system kind of radiates out around the planet.
And this attack by the Houthis, which started off very small scale, you saw a helicopter assault onto a ship. The Galaxy Leader back on November 19th has now escalated. And what we've seen is not just container ships that have started to divert around, but now liquified natural gas carriers, liquified petroleum gas carriers, tankers, and even bulk vessels are now moving around.
And as you mentioned, this adds 3,500 miles. But the biggest thing is it creates massive delays and disruptions. And for the Houthis, which are a small player, you know, one part in a three-way civil war in Yemen, they have created more disruption of global trade than you -- you almost have to go back to the world wars to find something similar to this.
Tracy: (04:06)
So Sal, you mentioned that the Houthis have sort of expanded their repertoire of attacks, I suppose to now include LNG and bulk vessels and things like that. What is their strategy here and how has it evolved over time? Because we have seen an escalation since November, but there were sort of isolated attacks happening [even] before then. So what is changing here?
Sal: (04:30)
Yeah, so initially they were focusing on ships connected to Israel. I mean, the root of this issue is the Houthis’ kind of solidarity with the Palestinians and Hamas in the Gaza Strip. And then again, it goes all the way back to the Israel-Hamas issue.
But we've seen the Houthis attack ships prior to this. Go back to 2016, 2017, we saw attacks on UAE vessels. We saw an attack on a Saudi frigate. We even saw an attack on a US Navy destroyer. But this effort recently is focusing on Israeli-owned Israeli flagships.
So we saw ships of ZIM and other Israeli companies immediately divert, but then the Houthis expanded. They started targeting vessels, they said [were] connected to Israel, either through their ownership, so for example, Mediterranean Shipping Company, what [is] the largest container liner in the world. They started targeting their ships because the owner's wife, of Mediterranean Shipping Compan,y has dual citizenship -- Switzerland and Israel.
And then we saw attacks that really had no connection at all to Israel, but they would try to make those attacks. And what these attacks are doing aren't really so much damaging vessels. We've seen ships hit and we had a very dramatic one just the other day with a ship called the Marlin Luanda, which caught fire.
But what they're doing is raising the cost to sail through this area by escalating war risk insurance. And we saw a very similar thing happen in the Red Sea between Russia and Ukraine. But by escalating war risk insurance, the added insurance you need to sail through an area, you make very expensive ships such as container ships, which have a value of between a quarter to a half a billion dollars, cost-prohibitive to sail through. We saw the war risk, for example, jump from 0.02% the value of the ship up to 1%. And when you start doing the math on value of vessels, the very expensive vessels find it more costing economical to sail around Africa.
Joe: (06:27)
Wait, wait. This is interesting. How is war risk insurance assessed? And when you say, like, 1%, is that per trip? How do those… talk to us a little bit more about these deals and the math there.
Sal: (06:44)
Sure. So shipping insurance is done by a group of companies called clubs. And they get together and literally there's a committee in London that puts together areas of war risk. They identify the areas that there are confrontations and basically whether or not you need this added insurance, kind of like flood insurance for your house. If you don't have it and your house is damaged by a flood, your normal insurance wouldn't cover it.
So they identify the area in and around the Red Sea as a potential war risk, initially down to that 0.02%. But as the Houthis attacked and then increased their level attacks, they have ratcheted up that war risk. We're seeing right now, for example, up in the Black Sea, that war risk is right around 1.25%. That's come down from about 3%. And so this committee will assess that. And if you want to sail through these regions and they specify latitude and longitude and the distance, you pay it for that one time void.
So let's assume you have a ship of a hundred million dollars, both the value of the ship and the cargo, then you have to pay a million dollars to go through there. And now, you start weighing that against, well, it's about a half a million to go through the Suez, but it's going to cost me over a million dollars in extra fuel to go around. What's the cost-benefit here for doing it?
And what we saw is on the higher end ships, the container ships, the LNG and LPG carriers, then they were weighing as like ‘Okay, it's much more economical and safer for me to go around Africa than to take this risk.’
Tracy: (08:14)
This is something that I wanted to ask actually, but who makes the ultimate decision on what route to take? Because as I sit here and I sort of imagine all the different actors involved in one journey, any one of them would make sense. Like the captain could make the decision, the shipping company, maybe the insurer is ultimately the limiting factor by virtue of the cost that you just laid out. Maybe governments decide that it's just too dangerous to go this route. It could be anyone. So who's the sort of big decision maker in all of this?
Sal: (08:47)
I mean, ultimately it comes down to the company and the company will make those decisions of where to go. They'll consult with the insurance companies to see what kind of war risk insurance they can get, what kind of policy they can get, what deal they can get.
Some insurance companies may not want to underwrite a vessel because it's too dangerous or they view it as, you know, so we had this ship that got hit the Marlin Luanda and that ship probably paid a million dollars in war risk insurance -- we don't know for sure, but probably, based on the value of the ship and the cargo. But the damage inflicted on the vessel was well over a million dollars.
And so if you're an insurance company, you’ve got to weigh ‘Am I getting enough premiums in from the other companies to continue to assess this?’ And, you know, registry comes into this, maybe a national registry will sit there and say ‘We don't want our ships to come through this area.’
And some companies will take the risk. We've seen large container companies, CMA CGM for example, which is a French-based container company. They have run some ships through there. They did that while paying a very high war risk insurance. But they think that the offset was the US Navy and the Royal Navy were there protecting them. And then they got the additional escort of French vessels riding right alongside of them, taking them through this area.
And the reason they're doing that is because, in economics, they saw the redeployment of containers from Europe to Asia of being such high value that it offset the potential downside of it. So there's a lot of factors that are going into this, but what we're seeing now is because of those attack, and the escalation of the attacks and the severity of the attacks, more and more ships are now shifting away.
We've seen a reduction in the total number of ships going through the Suez Canal about 30% downward. But what we're seeing in terms of tonnage, it's almost 50% to 60%. So the very large vessels, very expensive vessels. You're making that diversion around.
Joe: (10:56)
Let's get into the military component. You mentioned the French Navy, the escorts. What are the different strategies that -- whether it's the French military, the US military -- have taken in trying to protect the ships? Is it all, like, these sort of one-for-one escorts? How does that work?
Sal: (11:14)
Well, that was a big issue. How are you going to do this? Are you going to do Tom Hanks and Greyhound and run these escorts through> And tell you the truth, the militaries don't like this mission. It's not a very glamorous, sexy mission, but it's one that's really essential.
And it really was bread and butter for the US Navy for years, literally the founding. So what the Navy decided, and when they initiated operation, what they call Prosperity Guardian, was to take their very sophisticated destroyers -- these are the Arleigh Burke-class destroyers supplemented by Royal Navy Type 45 destroyers. And what they have done is basically set up a series of fence posts between Yemen and the main shipping channel. And these destroyers are there to catch the missiles that fly overhead. And so they're shooting down drones and these anti-ship, either cruise missiles or what's really amazing about this is, ballistic missiles.
Something we have not seen before is these missiles that fly a very high trajectory and come down. There's a lot of debate whether or not you could even hit a ship with a ballistic missile. So these destroyers, the US and the British, are providing these gatekeepers. And then you have other navies, the French Navy, the Italian Navy, and most interesting of all, I would argue, the Indian Navy, which has come out in big force to provide kind of direct escorts.
And the problem you have is it's very defensive. They're reacting to the situation. Now, we saw military strikes take place, and the commander of the naval forces out there, vice Admiral Brad Cooper, is very clear in differentiating the two. There's a defensive operation and then there's the offensive operation. And the offensive operation was trying to eliminate the potential for the Houthis to launch attacks.
The problem is the Houthis have been subject to attack for over a decade by the Saudis. And even these naval missions launched from the carrier Eisenhower and from support bases ashore haven't been able to eliminate the threat of the Houthis.
Tracy: (13:08)
What's it like going through the Suez Canal right now? Because one of the reasons we wanted to talk to you is, you know, you are speaking to people within the trade. I imagine they are telling you some very interesting and exciting stories right now, which would be very different to what going through the Suez Canal has historically been like.
I remember reading this one book about global shipping, what was it called? I think Ninety Percent of Everything, something like that. And the author wanted to write about shipping and she wanted to do a sort of first person narrative. So she went on a container ship that went through the Suez Canal. And from what I remember, it was really boring, literally dry as dust. Nothing happened. There's really not that much to see, it was still a good book. But I think things must be different right now.
Sal: (13:55)
Yeah, that was Rose George's book, an excellent book. It's usually pretty routine, but this is also the area where we saw Somali piracy. And so right now, when you come out of the Suez Canal and you're heading southbound, you're heading for the Indian Ocean, you'll get to a point about midway down the Red Sea, around the Port of Jeddah and Port Sudan where you'll stop and meet an offshore vessel.
And what ships are doing right now are taking on board security detachments. These are private security detachments. They come on board and they will ride the ship out until you're about off the coast of Oman. And then those crews will get off onto another supply boat and then they'll probably board another vessel and go the other way. And those crews do that for about two to three months. And these security detachments provide guards against small boats, kind of against drones, but they're really geared more to the smaller boat threat.
And right now what you're seeing is as you get down to the very southern end of the Red Sea, the Southern Red Sea is like a funnel when you get down to what's called the Bab-el-Mandeb. And you're sailing literally right along the coast of Yemen within sight of the coast of Yemen in many places. It's about a hundred something miles long, about 150 miles long.
And it's kind of a shooting gallery right now. What we've seen happen escalating since December is the Houthis would take shots at vessels and it's very hard to hide even if you turn off your a IS, this is the transponder ships have. You are clearly visible. Plus there are vessels in the area that we believe are spotting either Iranian vessels or Yemen vessels that are spotting. And lots of times these attacks take place and you're getting calls from navy vessels on open channels to evade or turnaround.
So for example, on January 9th, which was probably the largest battle we've seen, the US pushed through four US flag vessels. They came down through the region, they had been holding north of the area. They were told to go ahead and sail through. They didn't have a direct escort. They were sailing under the protection of the US Navy. But while they were sailing down when the strike started, they received word from the British Navy that they needed to increase speed and escalate.
And talking with the crews on these ships, a couple of things came through very clearly. Number one, it was three hours of really excitement. I won't say the words they were using, but there was a lot of stuff flying and they used some very good salty terms to explain it. But they also wanted to thank the navy crews. They said they would've not gotten through that without the effort of the US Navy and the other navies that were there.
But there were issues. For example, on the US ships, there was no secure communication. There was actually an instance on one ship where the Navy tried to call them on a satellite phone on board the ship, but the ship had a series of satellite phones and they called the wrong number. So communication wasn't great. And so again, this is not a mission that's very high up in terms of the US Navy and other navies. So practicing it doesn't really take [up] a lot of time and it's kind of showing right now.
Joe: (16:53)
Oh, so these things like not having the right phone number or not knowing [the number], this is just a function of [the fact that] this is sort of new. This is not something that's been in practice, not something that's anticipated. Were this to persist, these things would presumably get smoothed over?
Sal: (17:08)
Well, I don't want to say the Navy doesn't practice this because they actually have organizations within their structure that does this. The problem is it's very low priority. You know, it doesn't get the attention and probably the resources it deserves. And there's also the perception that this was going to go away pretty quick. That, you know, we're going to do a show of force, we're going to strike the Houthis and that should clear it up.
And what we've seen is the Houthis are kind of being tenacious here. They keep shooting one missile, and while the Navy will make the point, well they're not shooting 22 missiles like they did on January 9th, if that one missile hits a ship, it's going to deter other vessels from going through.
Joe: (17:47)
Do you hear anything from the actual, the people working on the ship or the captains, about reluctance to work on ships that are taking this route? Has there been any concern from just sort of the pure safety of like, okay, maybe the company deems it worthwhile to continue to take this route, but the safety of the crew?
Sal: (18:09)
Well, one of the things that the crews will say is they're fine going through, they know that there's risks involved in shipping in every day. What they want is to be compensated. You know, I mean, again, ships crews are doing this. And one of the things you saw early on is a lot of the foreign crews, for example, through their agreements, were able to get additional, not just money, but you know, what they really wanted was ‘Hey, if something happens to me, I'm going to have insurance and I'm going to be covered by this and, you know, if I'm hurt and worse if I'm killed, you know, I want to make sure my family at home.’
Ironically, the place I heard the most issues with was on US ships where US ships have to deal, for example, with multiple different unions and different unions had different agreements in place. And there was actually an issue recently where two ships had to go through and they actually got turned around, two US flagships. First time I've heard that in a long time that US ships were denied passage, but some of those crew were not yet given the agreement. Now the company has since worked out those agreements, but for the crew going through, they'd kind of like that in place before they get shot at.
Tracy: (19:13)
So we have seen [spot] shipping rates go up recently, but my impression is that a lot of the shipping rates are, you know, the shipping rate is sort of pre-agreed, contractually agreed some time ago. And yet we have seen this increase in costs. You described how the wartime insurance rate goes up, it seems [it does so] fairly quickly. You have captains that are presumably wanting additional compensation for taking on this risk. How quickly and how much could shipping rates actually rise from here?
Sal: (19:46)
So, you know what we saw during the height of the supply chain crisis, you see all those charts, that was the spot [rate], right? That's the rate you pay if you don't have a long-term commitment in place. Most shipping, most containers, for example, are on long-term charters. And so those, you know, about 70% of the cargo that's moved is on long-term.
But ironically, the route between Europe and Asia was up for renegotiation as of January 1st. So right when this was taking place, we saw that happen. But even if you have a long-term shipping route agreement, there are charges that can be imposed on top of that surcharges for extra fuel for port stays.
And so a lot of companies that were shipping goods all of a sudden started getting notices like ‘Well, my container's going to be a thousand dollars more than I thought it was going to be.’ Well, that's because the company sat there and said ‘Well, I had to stop in South Africa and buy really expensive fuel. Plus we're not going to the port initially, we were going to drop your container off in, so we’ve got to drop it off in a sub port and it's got to be moved over there.’
And so we saw the prices begin to escalate because the shipping companies tend to pass that cost on. And what you're seeing now is even the long-term rates are seeing readjustments because of that. Plus the shipping companies have to readjust their schedules. You know, if you had a container ship that was going through the Suez and stopping in the Med, that's not happening now. And now you're seeing ships stop at other terminals dumping their containers and reshuffling them. So the ports at the entrance to the Med, Tangier and Angier and Algeciras, are getting a lot of business because you have to reshuffle containers.
And so now the, the freight rates are changing. If you look at the freight rate charts right now, they kind of peaked and they've kind of dipped down and now they're starting to stabilize at this point. But we're also seeing impacts in other ways.
So for example, the US freight rates get negotiated by May 1st, but we're seeing freight rates increase to the United States. Why? Because a couple of factors, if you are shipping containers from Asia to Europe, I mean to Asia, to North America, for example, well you may be shipping it, you know, I don't want to go to LA and Long Beach anymore because of the issues with LA and Long Beach that happened a couple of years ago. So I'm going to put my containers on these new Neopanamax ships.
They go through the big lane of the Panama Canal that opened in 2016. But, [it’s not] like we don't have enough choke point issues. Panama Canal’s at low water levels. We've seen a two thirds reduction in the number of ships going through there. So now you've got this fully loaded Panama, Neopanamax ship, it arrives on the Pacific side of the Panama Canal and they can't get through because it draws too much water.
Now I’ve got to take 3,000 boxes off rail them across Panama and meet them on the other side. That's a cost I didn't plan on. That ship comes to the United States offloads. But instead of going back the way it came, because it doesn't want to take a passage through the Panama Canal, it's now going to head back to Asia through the Mediterranean and the Suez Canal. But wait a minute, the Houthis are there. Now I’ve got to head around Africa. And so what you're seeing is a lot of surcharges and extra charges and most importantly, delays in the movement of goods that were not planned on.
Joe: (22:56)
I want to talk a little bit more about the military response, but, you know, I imagine we could do like a 20 episode series about the history and founding of the US Navy, but we are just doing, you know, we have a 35-minute podcast. Can you just zoom out? I've heard that the US Navy is sort of originally created in part to, you know, to secure shipping against pirates, etc. Can you talk a little bit about the history and just the expectations globally for what the navy is expected to do anywhere when there is either a military threat or a piracy threat to world trade?
Sal: (23:34)
Yeah, I mean, 230 years ago this year, 1794, the Navy basically creatde itself with the Naval Act of that year where they built six frigates, one of which is still in commission today -- USS Constitution up in Boston. Those ships were built specifically because the state of Algiers had seized 11 American ships and were holding them hostage for basically tribute for an agreement with the United States.
So literally the birth of the US Navy is founded on an anti-piracy and [to] defend commercial shipping. Now ironically, those ships aren't built in time to fix it. What we go do is basically negotiate out a treaty Algiers and they release the vessels and we have an agreement. But then fast forward a few years later, 1801, the shah of Tripoli announces war with the United States by having his men march down to the US consulate in Tripoli and chop down the flagpole.
And for five years, Thomas Jefferson has got to wage a war against the Barbary Pirates. We try an overwhelming military force, it doesn't actually work. We try overland military operations, which the Marines immortalized in their ‘to the shores of Tripoli,’ in their hymn.
But in truth, what we wind up doing is paying off the Bashaw. We give him $30,000 and we get a deal. He releases some captured Americans, including the crew of an American naval vessel, and we get peace. Fast forward a hundred years, German U-boats start sinking American ships on the high seas, 10 vessels, 64 crew members killed. That's the reason Woodrow Wilson goes before Congress on April 2nd, 1917 and wants a declaration of war.
And so the US Navy has historically been a protector of trade, but usually it's a protector of US flag shipping. But that all changes after World War II, when the Germans and the Japanese are vanquished, the seas become this great open, you know, medium. This great, you know, blue ocean of commerce that takes place.
And one of the things that we see happen beyond technological changes, super tankers and containerization is we see the birth of open registries, the Marshall Islands, Panama, Liberia, so that you can have lower shipping costs because those countries don't require a huge amount of overhead and taxes. And they don't require it because they don't have to pay for navies because no one is threatening the ocean commerce.
Now, [in] 2023, here come the Houthis and they are threatening ocean commerce, but you don't have the Panamanian, Liberian, Marshall Island Navy show up because they don't basically exist. It falls upon the US Navy, the Royal Navy, and these other navies to defend the commerce because we move commerce differently now. We don't move it on national ships, we move it on international ships.
Tracy: (26:26)
Do you think you could see more of a reordering, a shift away of from flags of convenience?
Sal: (26:34)
I think the thing you may see is not so much that, I would argue, because I think, you know, those ships are getting the protection that they need. What I'm concerned about with the Houthis and what they're doing is breaking up the idea of this international blue water where you can move goods freely.
And what we start to see is something that Bruce Jones talks about in his great book To Rule the Waves, where we start seeing the breakdown and creation of regional shipping because people don't want to ship long distances, they want to ship local distances. We're seeing that right now, for example, in the LNG trade where you have three big players, Australia, Qatar, and the United States. But now, you know, we're really seeing that shift take place where the US is providing a most of their LNG now to Europe, viz Asia. Qatar is not shipping to a Europe as much. They're moving to provide their LNG to Asia.
So my concern is that. If we can't handle a threat like the Houthis, and again, we've seen multiple issues happen in the supply chain. Remember the big difference you have now today than ever before is not just the volume of trade. We've gone from moving half a billion tons of cargo on the world's oceans in 1950 to 22 billion tons today. It's the velocity. And when you have something moving as fast and as large as that, all it takes is a little, you know, sand pebble on the runway and you create a bump.
Joe: (28:12)
So when you're thinking about comparing this crisis versus say the Somali piracy that people talked a lot about a decade ago, how much more is it, basically, as you say, the increased velocity of world trade since then, I assume it's continued to grow, basically [that]magnifies the degree of disruption?
Sal: (28:33)
Oh, I mean even since 2000 you've seen a massive increase. But the Somali piracy was very limited. Remember what Somali piracy was, it was an issue ashore drove the Somalis to sea. And then what they were doing was seizing vessels and holding them for ransom. It was basically ransomware, you know, what they were doing.
And they would seize a vessel, bring it in Somali waters and wait for a bag of money to fall from the sky. And then they would release the vessel. And you could interdict that by moving ships further at sea. We saw Navy patrols come up and, you know, the only time you saw the US Navy, for example, take direct action was when an American flag ship was captured. When Maersk Alabama was captured and Captain Phillips was taken, then the US intercedes, because you have to save Tom Hanks, he's a national treasure . You can't allow him to fall into the hands of the Somalis.
But what's different now is the Houthis aren't doing this for monetary reasons. They're doing it for ideological reasons. And they're able to affect the trade on an international level. The Somali piracy was a blip on the radar. It didn't really affect world trade at all. You didn't even see rates go up very much because of that. This is much different.
Joe: (29:43)
You mentioned that the Indian Navy has gotten involved, which sort of raises the question in a, you know, multipolar world, [with] rising other superpowers, and the other big one is China and of course they’re major beneficiary of the trade through this route. What is your expectation in the future? Will there be more sort of regional shipping police forces de facto, would you expect to see an expectation that other larger countries that benefit directly from this type of trade have more resources in the area?
Sal: (30:19)
So I was very surprised for example, that that the US and other nations didn't put together some sort of an element here to go in and do this. You know, they basically, there was an argument that the US waited for a UN action to before they struck.
The fear you have here is that nations will act unilaterally. So talk about the Indians for a second. Indians are greatly impacted by this. India has seen a growth of trade to Europe and, you know, India trade to Europe goes right through the Suez Canal. And now if you've got to go around Africa, that's like three/four times the distance for Indian trade to go. It's a massive change for them. Plus Indian crews represent a big majority of the world's crews out there.
And one of the things we've seen is the Indian Navy come to the rescue of their crews. The ship that was just hit the Marlin Luanda, had a largely Indian crew on board. And it was an Indian Navy destroyer that actually came on board, fought the fire and helped save the vessel.
And you can see an issue where we saw, during the piracy issue, where India, when they encountered pirates, did not really use a lot of restraint in their force. They were pretty clear using overt force to convince the Somali pirates not to mess with ships with Indians on board. And the fear is, you can see that again.
You also have the issue with China. China has an overseas squadron based down in Djibouti. We haven't seen much from them. They're escorting their vessels in and out very low key. But you know, if there's an issue with a Chinese ship, will China intervene? We've already seen a couple of Chinese ships come under attack with no action by China. But the fear is that you'll see regional navies, especially navies that have a big impact on shipping. And India, I think is the big player to watch right now. They're really interesting. They've come out in force after the attack on a ship in the Arabian Sea, pretty close to Indian territorial waters.
Tracy: (32:11)
I just want to press on the US military point a little bit more because you did a fantastic job of laying out the historic importance of protecting trade to the US Navy. That was sort of the whole raison d’etre in many respects. However, we have seen this sort of reluctance, or at least a debate, right now to engage further with what's going on in the Suez. Is that unwillingness on the part of the US to get involved in yet another thorny military conflict? Or is it, I guess, inability in the sense that there are limits to what nation military forces can actually do against what is essentially geurilla warfare?
Sal: (32:55)
Yeah, this represents a historically, you know, common threat that the Navy has faced in the past, but not one recently. And so the Navy, I would argue, has not done a great job of articulating what they're doing and their mission. But they haven't put a lot of press on this in many ways.
So I don't think they're doing a great job in conveying exactly how important [this is]. Fr most Americans they see this as a European-Asian conflict. This is where their trade is. It really, you know, they're not contextualizing how this impacts the United States. And my argument, you know, I'll keep saying, is it's going to. It just takes time to work its way through the supply chain system. By the time you feel it, it's too late to react. And that's one of the issues here. I do think that the US Navy and the military in some ways are being hamstrung by the resources given to them.
I think they were delayed in doing anything when the Carney had this very visible, you know, intervention and saved three ships back in early December, I think about December 9th, that should have been a key moment there. That should have been a moment of where a decision was made about whether or not to do a large-scale protection. It took, you know, several weeks after that to really announce it and then to get it into full force.
But this is a historic mission for the US and other navies. And the other element is really the slow reaction the US has gotten from other allies. You've seen the British Navy, you've seen the French and the Italians, but not a lot of other navies coming in. I mean, the Indians are kind of doing this separately. You haven't seen Asian navies, the Japanese, the Koreans come in.
This really should be a unified effort, because this is an attack not on just American shipping, but on world shipping. And to me, this is the context of why this needs to be better articulated. And again, the concept seems to be handed off to the military -- let the military solve this problem, when the root cause of this problem goes back to what is happening in Israel and Gaza.
And until you fix that situation, until there's MidEast peace, then you have a problem with the Houthis. And how do you exert pressure against the Houthis? There was a story a few weeks ago about the shipping companies trying to buy off the Houthis. I don't think you buy off the Houthis because they're not in this for money.
However, there is leverage that can be exerted either through Iran or some other forces at play here that maybe you can convince them to push back on the Houthis, or talk to the Israelis and have them back off and see if you can get the Houthis to kind of diminish. But it's really hard to make that argument because you're seeing lives lost in Palestine, whereas in the Red Sea, all we're seeing, as of now, is the loss of money.
Joe: (35:37)
Well, I mean, I'm glad you mentioned that because it struck me when you were giving your excellent, you know, two-minute entire history of the US Navy that even when you mentioned some of the key moments, it was actually some sort of political resolution and not the show of might itself that solved it, including, you know, the original Pirates and the Shah of Tripoli. It sounds like it's something other than the force which [put an end to] it. So ultimately it sounds like this is going to be a problem as long as the underlying tensions in the area, the ideological issues, the ongoing war, are there.
Sal: (36:11)
Yeah, you know, the Navy just recently had their Surface Naval Association meeting where, I mean there was a lot of congratulations on the role of the Navy destroyers, which have been doing a phenomenal job. Again, I talked to mariners, they love the Navy for what they're doing.
The problem is, again, you're not convincing the Houthis about this or the ships. It's the insurance companies. And the insurance companies are going to use the line from Dumb and Dumber: as long as there's a chance of them getting a hit, you know, that means that we're going to have higher war risk insurance and therefore it's going to make it cost-prohibitive to go through what we're seeing.
For example, up in the Red Sea right now with the rebirth of this new trade going into Ukraine, after the death of the Black Sea Grain Initiative, we're seeing ships going up and back to the Ukraine. And that's seeing a deescalation in the war risk from 3% down to 1.25. But that's still high. But you're dealing with bulk ships and smaller ones, [where] the cost isn't as much. Plus you have the Ukrainians working with insurance companies to underwrite that.
We don't see that right now. And that's another element that could be done. But again, to underwrite war risk insurance for ships, they have to be of your registry. The US isn't going to underwrite ships under the Marshall Islands, under Liberia probably, although most of those ships can trace ownership back to western companies in US, Europe, or even East Asia.
Tracy: (37:33)
How long until the slowdown, and I guess the additional complexity that you've been talking about, how long until that makes its way to US supply chains? Because so far, you know, most people are talking about this as a Europe or Asia specific problem, but as you point out, it just takes some time to reverberate.
Sal: (37:53)
Well, I mean, you're seeing that right now in Europe. You’ve had a very kind of high visibility [companies], some manufacturers, Tesla and a few others, had to shut down production because they're waiting to get parts to them. And you're seeing the impact of that also in the fact that ‘Well, we’ll just throw them on airplanes and send them over.’ Well, 30%-33% of the world's aviation fuel goes through the Suez Canal and now it's being diverted. And so now even aviation has issues associated with it.
It tends to be weeks. And we're going to see it as right after the beginning of February, because what has happened here is a lot of empty containers -- which is the most unsexy topic you can talk about is empty containers -- empty containers have not been re-positioned back to Asia in time to be reloaded and put on ships to leave Asia before the Chinese New Year, before the second week in February.
Which means that goods that should have been sailing across this week and next week aren't going to be there. Which means now you're going to see them about a month later. So we're going to see some delays. And again, we're not going to see shortages, we're not going to have the great toilet paper run that we had during 2020. But what you will see is a little bit of a spike in inflation in terms of transportation costs. A lot of disruptions.
One of the things that we did learn from 2020 and a lot of freight forwarders and smart people who went with companies that do this professionally did, was diversify how their goods come in. So there was a lot of companies who saw what was happening with the Houthis and sat there and said ‘Hang on, let me get my goods on a container ship and I'll go into LA and Long Beach right now, because even though I hate it, I'll go in there because I know they're going to arrive. And I can get them in there and I'll pay that rail because rail is looking for cargo right now.’
So a lot of people began to make movements, but some didn't. And the ones who didn't see this coming ahead of time, they're the ones who are going to see it. We're already seeing backlogs of ships, for example, start to pile up off of Savannah and some of the East Coast ports.
Joe: (39:55)
You mentioned that empty containers were not the sexiest topic, but I disagree. I think the very first episodes Tracy and I ever did on supply chain disruptions at the end of 2020 was sort of related to this phenomenon of the ships coming from China to the US dropping off their stuff, not having anything to ship back. So they immediately turned around and then there were no more empty containers and that was sort of the seed. So it's a big deal.
Alright, I just have one last question, which is that, you know, I'm a dad and I'm well into my mid-forties and so by nature I have this sudden impulse to read more military history books. What is a good book about the history of the Navy that I should read?
Sal: (40:34)
Well, I would recommend Ian Toll’s Six Frigates, which it literally talks about the birth of those six frigates. I think Ian Toll does a great job. It is kind of [a must read] because it covers that early period, the birth of the US Navy, but it's also about trade because you learn about, okay, I [talked] about that issue with Algiers, but then you learn about the French attacking our commerce in the Caribbean during what calls the Quasi-War, then the War of 1812, which is all about commerce and the impressment of Americans because, you know, the US wants to trade with everybody because that's who we are.
So we we're trading with the British and the French during the French Revolution and the Napoleonic war. Thomas Jefferson then tries to, you know, avoid this by passing the worst act ever passed in the history of the US, the Non-Intercourse Act, which doesn't deal with what you think it does, but it deals with shipping and not trading with both Britain and France.
So I love Ian Toll's book. I think he is one of the best. And then the last one I I'd throw in there is, is one on US shipping. That I think is, really, it's a wonky one. It's not a great read, but I think it is really an important one called The Abandoned Ocean, which talks about US maritime policy.
Tracy: (41:46)
I am conscious that we only have a few minutes left, so I just have one more question. What do you think of the Jones Act?
Sal: (41:53)
Joe: (42:05)
Tracy is a masochist.
Tracy: (42:07)
No, that was a joke. We have been meaning to have you on for a Jones Act-specific episode for literally years now. We’ve got to get that done in 2024, Joe.
Joe: (42:18)
We will definitely do a proper Jones Act episode one day.
Sal: (42:22)
Well, I appreciate it. And actually you may hear about the Jones Act with this because as diesel ships [are] bringing diesel out of Asia, heading to Europe, [they’re] going to take longer to get there. There's going to be a real big desire to pull diesel out of New England and send it across. And if you start stealing diesel from New England to send to Europe, you're going to have to get that diesel to New England some other way. And that's either by pipeline, which is jammed, or those infamous Jones Act tankers.
Joe: (42:45)
All right. Sal, thank you so much for coming on. That was great. We really will have do a proper Jones Act episode, but this was excellent context and details about the current crisis. So thank you so much for coming back on.
Sal: (42:58)
Can I be clear, John Konrad said ‘Whatever you do, don't bring up the Jones Act.’ He said that. He said ‘Don't bring it up, just try to get through it without talking about it.’
Tracy: (43:05)
You stayed true to your promise. I brought it up. You pivoted.
Sal: (43:11)
And I told John, I said ‘There's no way it's coming up. There's no way they can bring it up.’ And then Tracy, you bring it up right at the end. That's funny. I can't tell you how much I was laughing, I had to mute the mic for a second.
Joe: (43:36)
I love talking to Sal. We’ve got to make that Jones Act episode happens soon.
Tracy: (43:39)
I know. I feel bad that we keep touting it and it never happens. It's
Joe: (43:43)
It's so funny because we've never done it, the Jones Act comes up all the times. I almost feel like we're associated [with it] -- it's like that and onion futures, we've never done an episode on that, even though we talk about them all the time.
Tracy: (43:53)
I think the problem is the stakes are now so high because we have, you know, they have come up repeatedly for years now. If we ever do an episode, we want to do it in a big way or we want to do an event around it. And we just haven't been able to make that happen yet.
But there were so many interesting things. Yeah. To pull out of that conversation with Sal, I thought his pinning [down’ of the timeframe in which you might see some impact on US shipping. I thought that was really interesting, to actually get a firm time period and the idea that, well, things might be messed up because containers have been going empty again and Chinese New Year is coming up. So we'll definitely be watching that.
And then I guess his explanation of just how the insurance actually works, wartime insurance, and how quickly it seems Yes. Some of those decisions are made.
Joe: (44:46)
Yeah, I thought that was really interesting and this idea that like on each route you buy the insurance and sometimes it's up to 1% and eventually, you know, it can jump to the point where just the math says ‘No, between this and the added fuel costs of taking a much longer route, [it’s not] worth it.’ And how quickly that adjusts and how there's this club of insurers and they're always [assessing].
I thought that was really interesting. I also did think it was really interesting that in his history of the Navy, like all of those sort of, many of those key moments he described, like in the end it was the political solution that ultimately took care of the problem.
Tracy: (45:22)
Right. And not a military solution.
Joe: (45:24)
Yeah, that ultimately you need to address the underlying diplomatic crisis.
Tracy: (45:30)
So, peace in the Middle East?
Joe: (45:31)
Right. Well this also, I mean this broader phenomenon where the Houthis, like this small military that Saudi for years attacked and wasn't able to eliminate their force. And this is idea that he brought up that since World War II there has been this generally stable expectation of global trade, but this idea that it could refragment, particularly. Small militaries are able to stand up to large militaries, it’s like a really interesting long-term question.
Tracy: (46:02)
Right. The regionalization of shipping. That was really interesting because again, you think about shipping, obviously it's this sort of global industry, but it's global in very specific ways, including those flags of convenience where you can sail under a Liberian flag or something like that because you enjoy the benefits of other governments that are going to protect strategically or commercially important waterways.
Joe: (46:28)
Yeah, that was great. And you know, I think people talk about deglobalization or, you know, bifurcation or whatever it is. But look, if you don't have this expectation anymore of, and maybe, you know, it's not dead or anything, but if this idea that it's getting easier and easier for small military forces to disrupt trade due to advances in weaponry and drones, etc., then that does seem like implicitly a force for deglobalization.
Tracy: (46:56)
Yep. Shall we leave it there?
Joe: (46:57)
Let's leave it there.
You can follow Sal Mercogliano at
@Mercoglianos
.