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As casualties mount and vessels continually come under attack in the Strait of Hormuz, some ship operators are offering danger pay to convince crews to pass through the U.S.-Iran warzone.
Bloomberg reported that South Korea-based Sinokor Group is offering crews up to six months’ salary for a one-month trip through the Strait, while other shipping firms have reportedly doubled pay.
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“Escalating danger-pay [is] … a sign that the labor supply for this route may be closing regardless of price,” Harold York, nonresident fellow in energy and global oil in the Center for Energy Studies at the Baker Institute, told Moneywise. “A crew that won’t sail can’t be priced into existence.”
Sinokor, however, may just try anyway. The company didn’t return Moneywise’s request for comment, but Bloomberg reported oil tanker captain salaries topping out at $15,000 a month, while junior sailors pull in $1,500 before the potential bonus pay.
This comes as the International Maritime Organization (IMO) reports 17 confirmed seafarer deaths in the Strait of Hormuz as of July 21, with 61 confirmed incidents of attacked or damaged ships since the conflict began at the end of February. As of early July they added that “around 6,000 seafarers remain stranded in the Persian Gulf” since the conflict began.
Meanwhile, about a quarter of global maritime oil trade passes through the Strait, raising fears of higher prices if the route is shut down entirely.
Fuel, freight and delays are piling up — and consumers may end up footing the bill
York doesn’t believe that increasing crew pay itself — which he estimated would ultimately only add a cost of “less than 2 cents per gallon” per tanker to Sinokor under the suggested bonus amounts — would pose a risk of raising prices for consumers.
He did, however, say that higher crew pay is “one more brick in a wall of rising risk costs” that includes skyrocketing insurance, as well as fuel and delays, with Gulf-linked freight rates already three to four times above pre-war levels.
York, instead, suggested that “the more direct channel to U.S. consumers” is the global crude benchmark.
Brent crude oil closed at just over $91 a barrel on July 21 — $20 higher than it had been earlier in the month — stoking fears of a Federal Reserve interest rate hike and boosted inflation. AAA, meanwhile, reported that gas prices topped $4 a gallon nationally for the second straight day.
Meanwhile, with total traffic in the Strait of Hormuz reportedly down 90% year-over-year, York not ed that “the search for alternate routes has been happening for months.”
A CNN analysis of alternate shipping routes, however, found that some detours — including going around the southern tip of Africa — can triple travel times and quadruple expenses.
“There is no cheap detour around Hormuz for Gulf crude oil,” John Calabrese, a Middle East Institute senior fellow, told Moneywise. “Rerouting means longer transit times, more fuel gets burned, tanker availability tightens, and freight rates rise.”
He added that “This shipping-cost inflation will show up at the pump and in anything transported by sea, but it will occur with a lag of weeks rather than an immediate spike.”
The United Nations Conference on Trade and Development previously warned that higher operating costs for ships “may increase food costs and intensify cost-of-living pressures, particularly for the most vulnerable.”
The conflict has already helped bump U.S. energy prices up more than 15% year-over-year as of June, according to the Bureau of Labor Statistics (BLS), while the overall Consumer Price Index jumped 3.5% in the same period.
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A new shipping chokepoint could keep prices higher long after the fighting ends
Beyond the potential costs of rerouting ships from the Strait of Hormuz — some of which could be absorbed by consumers — there’s also the fresh danger.
This week Houthi rebels in Yemen choked off Saudi Arabian shipping to its Red Sea ports via the Bab el-Mandeb Strait — a crucial corridor and Strait of Hormuz backup route that the Associated Press noted accounts for “12% of the world’s trade.” That includes, they added, “more than 7 million barrels of petroleum a day” as of June.
“The Houthi blockade threat against Saudi Arabia is the real multiplier here,” Calabrese said, calling it “a move that threatens to escalate the conflict and disrupt global energy supply and trade beyond the Gulf.”
One analyst warned Reuters that a cut-off of the Red Sea routes “undermines the whole global economy” and could lead to a worldwide recession.
York, meanwhile, warns that all of this instability could lead to “a structurally higher, sticky baseline of shipping costs” that lingers after conflicts in the region are resolved.
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“The market may be permanently repricing Gulf risk upward, which implies the added cost isn’t a short-term spike U.S. consumers can simply wait out,” he said. “It may be baked into landed fuel and goods costs for years.”
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
