Suez Canal Strains, Emerging Markets Brace for Impact

The Suez Canal is a critical chokepoint linking East and West, enabling faster, lower-cost shipping between Asia, Europe, and the Middle East. Shaped by empire, conflict, and expansion, it remains central to global trade and energy flows.

History & Significance of the Suez Canal

The idea of a waterway-connecting canal in Egypt dates back at least to the days of the Pharaohs. On November 17, 1869, the Suez Canal was christened providing a new 164 km (i.e., 102 miles) long and 56 m (i.e., 184 feet) wide shipping route between the Mediterranean and Red Seas. Ferdinand de Lesseps, a French diplomat and businessman, was the brains behind the venture. Tens of thousands of mostly French investors provided the funding, and the land that the canal runs through was granted by Egypt’s leader in exchange for a 44 percent personal stake in the project. This stake was later sold to the other investors making it almost completely a French-led endeavor.

Great Britain, which controlled the longer sea route around Africa to India, strongly opposed the canal’s construction. In 1882, Britain seized control of Egypt, prompting the 1888 Convention of Constantinople to define how the French-owned canal would operate under British authority. Even after Egypt gained independence in 1922, Britain retained control of the canal until 1956.

An Era of Upheaval at the Suez Canal

In 1956, Egypt’s President Nasser nationalized the canal. Britain, France, and Israel responded by launching a military offensive aimed at reasserting their claims, taking the Sinai Peninsula, and toppling Nasser. Egypt’s forces were rapidly overrun. However, the United States opposed the offensive, fearing Soviet military involvement and a shift of Egypt into the communist bloc. Under American pressure, the victorious forces withdrew. Egypt regained the canal, Europe was diminished politically, and the United States became recognized as the new global power broker.

Twelve years later, in 1967, Israel again seized the Sinai Peninsula during the Six-Day War. In response, Nasser blockaded the Suez Canal, turning it into a warzone for nearly a decade. In 1975, the United States cleared the canal of mines and wreckage, reopening it to international traffic. The Sinai Peninsula was demilitarized and returned to Egypt in 1979.

Modernization and Increased Capacity

In 2014, Egypt committed $8 billion to expand the Suez Canal. The project deepened and widened the existing waterway and added a second canal parallel to the original. This upgrade allowed for passage of mega vessels carrying more than 25,000 containers. The expansion was completed in one year, compared to the ten years it took to construct the original canal. Capacity increased from 51 ships per day to 97.

The canal remains essential for linking East and West. Without it, ships traveling between Asia, Europe, and the Middle East must route around Africa, adding between 8 and 20 days and thousands of miles.

Energy Transit and Trade Flows

About one-third of ships passing through the Suez Canal are oil tankers. On average, they carry 1.5 million barrels per day, but that figure has doubled recently due to European sanctions on Russian oil. Russian crude, once transported into Europe via pipeline, is now being shipped through the Suez Canal to reach buyers in India and China.

Europe receives most of its Middle Eastern oil through the 320 kilometer (200 mile) Sumed Pipeline, which connects the Gulf of Suez to the Mediterranean. The pipeline handles up to 80 percent of the oil Europe buys from the Middle East Gulf. As a result, Europe is not significantly energy-deprived if access to the Suez Canal is restricted. Additional oil can be sourced through alternate routes.

The United States continues to purchase oil from the region, but none of the nearly 7 billion barrels imported direct shipments since 2022 have passed through the Red Sea or Suez Canal. Roughly half of U.S. oil imports come from Canada, with 10 percent from Mexico. Saudi Arabia and Iraq contribute about 10 percent collectively, and Colombia provides another 3 percent.

China is energy insecure, but not due to an overreliance on the Suez Canal or Red Sea. Although around 70-80 percent of its imported oil originates in the Middle East, most shipments come from the Persian Gulf and avoid the Red Sea entirely. China’s vulnerability lies in geography. Imported oil must pass India, a strategic adversary, then through the 1.5 mile wide Strait of Malacca. It continues through the contested South China Sea and must navigate waters near Japan and the Philippines.

Beyond oil, dry-bulk carriers account for another one-third of canal traffic. These ships transport raw materials such as coal, iron ore, and grains, mostly to China. The remaining one-third of vessels are container ships that carry finished goods from China to Europe. Some ships bound for the U.S. East Coast use the Suez Canal, but most cross the Pacific to Los Angeles and move eastward overland or through the Panama Canal.

Regional Impacts

• Latin America. The closure of the Suez Canal would have little impact on Latin America for two reasons. First, the continent’s geography allows vessels to reroute around Africa without significant increases in cost, distance, or time. Using the Cape of Good Hope may even be faster and avoids transit fees. Brazil is a key example. It exports soybeans, corn, and oil to supply Chinese livestock and industry. Second, shipments from the continent’s western side can either pass through the Panama Canal or head eastward around Argentina into the Atlantic.

  
  

• Africa. Egypt would face severe consequences from a closure. In 2022, transit fees from the Suez Canal generated $8 billion, and this figure was expected to rise in 2023. China has invested more than $10 billion into Egyptian industrial projects, drawn by canal access and favorable tax agreements with Africa and Europe. A shutdown would likely derail these investments and discourage future foreign direct investment into Egypt.

  
  

  South Africa, however, would benefit. More ships would be rerouted through Cape Town, increasing use of its maritime services. This would strengthen South Africa geopolitically and make it a more attractive destination for investors. On the other hand, East African exports to Europe, such as Kenyan coffee, would face increased transportation challenges.

  
  

• Southeast Asia. Finished goods shipped to Europe would become more expensive and take longer to arrive, pushing Europe to seek alternative suppliers. Few intermediate goods travel through the Suez Canal, so manufacturing supply chains would remain relatively stable. However, European raw material inputs and agricultural exports would be negatively affected.