Oil Prices Soar, Red Sea Conflict Heats Up

Alvin Karunia By Alvin Karunia
7 Min Read
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Photo by stevepb on Pixabay

World oil prices have surged at the beginning of this week, in line with the escalating conflict in the Red Sea region that threatens global oil supplies. What is happening there, and what are its implications for Indonesia?

The Red Sea is a narrow strait connecting the Mediterranean Sea to the Indian Ocean. Stretching approximately 2,250 km with an average width of 280 km, it borders several crucial countries, including Egypt, Sudan, Eritrea, Djibouti, Yemen, Saudi Arabia, and Israel.

The Red Sea serves as a major trade route between Europe, Asia, and the Middle East. Through the Suez Canal, ships can transport goods from Europe to Asia without circumnavigating Africa. One of the commodities frequently transported through the Red Sea is crude oil.

According to data from the BP Statistical Review of World Energy 2024, the Red Sea is the world’s second-largest oil shipping route, following the Strait of Hormuz. In 2023, around 9.2 million barrels per day (bpd) of crude oil and oil products passed through the Red Sea, accounting for approximately 10% of the world’s total oil production.

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However, the Red Sea has also been a silent witness to various conflicts in its vicinity. Since 2015, Yemen has experienced a civil war between the government supported by Saudi Arabia and an international coalition, against the Houthi rebels backed by Iran.

This war has resulted in a severe humanitarian crisis, with millions experiencing famine, disease, and death. Additionally, the conflict has impacted security in the Red Sea, as Houthi rebels frequently attack ships passing through, especially those heading to or from Saudi Arabia.

Earlier this year, tensions in the Red Sea escalated further after Iran announced the seizure of the ‘St Nicholas,’ a civil oil tanker flying the flag of the Marshall Islands carrying Iraqi crude oil bound for Turkey in the Gulf of Oman. Iran claimed the vessel violated international law and endangered its national security.

In response, the United States (US) and the United Kingdom (UK) launched airstrikes on Houthi military positions in Yemen, including in the capital Sanaa and Hodeidah, using aircraft, warships, and submarines. US President Joe Biden stated that he ordered the military action in response to Houthi attacks on ships in the Red Sea.

The airstrikes targeted ammunition depots, launch systems, production facilities, and Houthi air defense radar systems. The US and UK stated that their goal was to prevent further Houthi attacks and disrupt global trade in the Red Sea.

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However, the Houthi rebels did not remain idle. They threatened retaliatory attacks against the US, UK, and Saudi Arabia, and vowed to stop all ships passing through the Red Sea. They also claimed to possess sophisticated weapons capable of reaching distant targets.

As a result of this conflict escalation, world oil prices experienced a significant increase. In Monday’s trading (15/1/2024) at 09:45 AM WIB, WTI crude oil prices for February 2024 rose by 0.18% or 0.13 points to US$72.81 per barrel. Brent crude oil prices for March 2024 also increased by 0.28% or 0.22 points to US$78.51 per barrel.

The rise in oil prices is attributed to growing concerns about potential oil supply disruptions due to the conflict in the Red Sea. If this conflict persists in the long term, it could trigger a global oil supply chain crisis, affecting oil availability and prices in various countries.

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What about Indonesia? As an oil-importing country, Indonesia will undoubtedly be affected by the rise in world oil prices. According to data from the Ministry of Energy and Mineral Resources (ESDM), in 2023, Indonesia imported an average of 1.2 million bpd of crude oil and oil products, while domestic production was only around 700,000 bpd.

Thus, Indonesia has an oil deficit of about 500,000 bpd, which needs to be covered through imports. If world oil prices rise, the cost of oil imports for Indonesia will also increase, adding to the trade balance and state budget deficits.

Moreover, the increase in world oil prices will also impact domestic fuel oil (BBM) prices, most of which are still subsidized. If domestic BBM prices are not adjusted to world oil prices, fuel subsidies will swell, reducing fiscal space for other public expenditures.

However, if BBM prices are adjusted to world oil prices, it will result in inflation and decrease the purchasing power of the population, especially those with low incomes. This will also impact economic growth and social welfare.

Therefore, Indonesia needs to find solutions to address its dependence on oil imports, which makes it vulnerable to fluctuations in world oil prices. Some measures that can be taken include increasing domestic oil production, developing new renewable energy sources, and reducing gasoline consumption by transitioning to electric or gas vehicles.

Thus, Indonesia can reduce its dependence on world oil, benefiting not only the economy but also the environment and the future generations.

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