On 12 October 2000 in Aden, Yemen, a small motorboat full of explosives rammed the USS Cole while it was in port for a refueling stop. Seventeen sailors died and another thirty-nine were injured by the explosion, which ripped a forty-foot by forty-foot hole in the ship’s side. On 13 December 2000 the USS Cole returned to the United States, carried aboard a transport ship, for repairs that lasted fourteen months. Two years later (6 October 2002), Yemeni terrorists attacked the French tanker Limburg while it was readying to receive its cargo of crude oil from an offshore terminal. Although Yemen is ideally located as a major Middle Eastern port because it borders the Red Sea and the Arabian Sea, the combined attacks on the USS Cole and the Limburg crushed Yemen’s shipping industry. A US Department of State (2002) fact sheet indicates that a 300% increase in insurance premiums led to ships routinely bypassing Yemen for competitive facilities in Djibouti and Oman. As a result of a 50% decrease in port activity, Yemen expects to lose $3.8 million per month as a result of the attacks.

The incidents in Yemen illustrate the direct and indirect costs of terrorism. The direct costs can be calculated by summing the replacement costs of damaged goods, equipment, structures, and inventories. Despite the difficulty of measuring the cost of a human life or the cost of pain and suffering, such calculations are now routine, using either lost earnings or the value of a statistical life. The indirect costs, such as the decline in Yemeni shipping revenues, are more difficult to measure. How much of the actual decline is due to insurance costs rather than to the military activities associated with the Iraq War or to higher oil prices is difficult to gauge. Beyond these lost revenues, Yemen faces increased security costs as it decided to purchase additional patrol boats and helicopters to guard its waters. Calculating the associated costs of any attack is difficult, since, unlike traditional crimes, terrorism is designed to create a general and ongoing atmosphere of intimidation and fear. Terrorists are most successful when they lead the public to expect future attacks. Because the psychological effects of the two Yemeni attacks were mutually reinforcing, they increased the “risk premium” necessary to compensate insurers for the potential damage of future attacks.