The capture of a Saudi oil tanker by Somali pirates has focused attention on the lawless waters of the Gulf of Aden and the Indian Ocean. This year's spike in pirate attacks is not just a reflection of Somalia's chronic instability, it's also symptomatic of an unstable region. An illegal economy is flourishing in the Gulf of Aden, with smugglers trading weapons, fuel and people between the Horn of Africa and Arabia.

Piracy attacks are clustered in the northern waters of the Gulf of Aden, close to Yemen's coastline. Yemen's government is officially engaged in diplomatic efforts to stamp out piracy and broker peace talks with the various Somali factions. But Yemen's tiny coastguard is poorly resourced and the country's foreign minister, Abu Bakr al-Qirbi, recently complained that plans for a multilateral naval deployment would pose a threat to Arab security. (He blamed Israel for wanting to increase its influence in the area.)

There's another reason why Yemen's elite may be reluctant to see greater foreign interference in the Red Sea and the Gulf of Aden. Yemen is the source of a significant number of weapons in circulation in Somalia, according to the United Nations' monitoring group on the 1992 arms embargo to Somalia. While million-dollar piracy ransoms are raising cash for arms, private interests in Yemen have no interest in ending piracy or bringing a halt to the war in Somalia.

And a new report by Chatham House concludes that Yemen's own internal problems may soon contribute to increasing instability in the region. The poorest nation in the Arab world confronts western policymakers with the prospect of another failed state. This veneer democracy on the south-western tip of the Arabian peninsula faces rapid population growth, plummeting water tables and dwindling oil supplies. Without substantial new discoveries of oil, the economy will surely hit a wall in the next few years and President Saleh's patronage networks will dry up, exposing divisions among the tribes, political groups and religious interests.

In addition, jihadi networks in Yemen appear to be growing as operating conditions in Iraq and Saudi Arabia become more difficult. The CIA director, Michael Hayden, said last week that Yemen is a "place where al-Qaida is strengthening. We've seen an unprecedented number of attacks this year. Plots are increasing not only in number, but in sophistication, and the range of targets is broadening." Twin car bombs exploded at the gates of the US embassy in the capital, Sana'a, in September, confirming fears that Yemen is facing a resurgent terrorist movement.

Smuggling crews have already ferried 40,000 refugees from Somalia to Yemen so far this year, turning over $4m. If Yemen slides towards failure in the coming decade, the links between organised criminals, people traffickers and terrorist networks on both sides of the Gulf of Aden will grow. State failure in Yemen would reduce any chance of progress towards peace in Somalia and create a lawless zone stretching from northern Kenya to Saudi Arabia – with 3.3m barrels of oil a day transported right through the middle of it, on one of the world's busiest shipping routes.