Can energy strength help Gulf economies weather Iran war?

Dubai: Gulf Cooperation Council (GCC) economies are facing rising geopolitical risks as tensions with Iran disrupt regional trade and energy markets. Yet economists say the region’s energy strength — including export infrastructure, large reserves and higher oil prices — may help cushion the broader economic impact.

The conflict has raised concerns about potential disruptions to shipping through the Strait of Hormuz, the narrow waterway through which about one-fifth of the world’s oil exports pass. Any prolonged closure could affect both global energy flows and economic activity across the Gulf.

The key question for the region is whether its dominant position in global energy markets can offset the risks created by the conflict.

Economists warn that countries heavily reliant on the strait could face the largest economic shocks if the disruption continues.

Goldman Sachs economist Farouk Soussa estimates that Qatar and Kuwait could each see their gross domestic product contract by about 14% this year if the conflict persists through April and results in a two-month halt of the Strait of Hormuz.

That scenario would represent the worst economic slump for those countries since the early 1990s, when Iraq’s invasion of Kuwait triggered the Gulf War and caused major turmoil in global energy markets.

Despite these risks, economists say the GCC’s energy infrastructure provides an important buffer.

The region remains one of the world’s largest energy producers, with countries such as Saudi Arabia and the United Arab Emirates investing heavily in export routes that bypass the Strait of Hormuz.

Pipelines linking Saudi oil fields to Red Sea ports and the UAE’s crude export pipeline to Fujairah allow shipments to reach global markets without relying entirely on the strait.

These investments strengthen the GCC’s ability to maintain exports even during periods of regional instability.

Because of this infrastructure, economists estimate that the economic impact on the region’s largest economies would likely be more limited than in countries that rely entirely on Hormuz shipping.

Goldman Sachs projections suggest Saudi Arabia’s GDP could decline by about 3%, while the UAE could see a contraction of roughly 5% if the disruption continues.

Even under that scenario, the slowdown would represent the largest economic shock for those economies since the pandemic in 2020.

“For many Gulf economies, the war could have a bigger near-term impact than Covid,” said Soussa, Goldman’s economist for the Middle East and North Africa. “When the dust settles they will rebuild and they will recover, but the scars this conflict leaves on confidence remain to be seen.”

Energy markets have reacted sharply to the escalating conflict.

Brent crude rose above $104 per barrel as concerns grew about disruptions to energy shipments and production in the region. Oil futures have increased by more than 40% over the past two weeks.

Higher oil prices could provide an important economic cushion for major Gulf producers.

The surge in prices boosts government revenues and can help offset pressures caused by disruptions to trade, shipping and investment.

Economists say the GCC’s role as a major global energy supplier means that any tightening in supply tends to strengthen the region’s fiscal position.

Analysts at regional research firms say Saudi Arabia and the UAE are among the countries best positioned to benefit from higher oil prices due to their ability to maintain exports through alternative routes.

Economists including Mohamed Abu Basha at EFG Hermes and Justin Alexander at Khalij Economics say the picture for the region’s largest economies is therefore more nuanced than headline risks might suggest.

The conflict has continued to escalate in recent weeks.

Iran has carried out strikes against neighbouring countries following US and Israeli attacks on Iranian facilities. Over the weekend, the United States targeted military sites near Iran’s crude export hub on Kharg Island.

Washington also warned it may strike Iranian energy infrastructure if Tehran continues attempts to disrupt shipping through the Strait of Hormuz.

US President Donald Trump said the United States is in talks with “about seven countries” about forming a coalition to secure the strait and escort commercial ships through the corridor.

A senior aide to Trump said the Pentagon estimates the conflict could last four to six weeks.

The conflict has already begun to affect several industries across the Gulf.

Global gas markets have been disrupted following a decline in Qatar’s liquefied natural gas exports, while Bahrain has reduced production at the world’s largest aluminium smelter partly due to supply challenges linked to the Hormuz halt.

Economists say countries such as Qatar, Kuwait and Bahrain could experience greater economic strain if disruptions to shipping routes continue.

Such disruptions may inflict the most damage on oil-dependent economies that rely heavily on exports passing through Hormuz.

Beyond energy markets, economists say prolonged instability could affect non-oil sectors across the GCC.

Industries such as real estate, tourism and investment flows can be sensitive to geopolitical tensions, particularly when regional security risks increase.

At the same time, Gulf governments have continued to pursue economic diversification strategies aimed at reducing long-term dependence on hydrocarbons.

These reforms — ranging from tourism development to manufacturing and logistics — could help reduce vulnerability to external shocks over time.

Saudi Arabia appears positioned to navigate the current situation relatively well. Several economists who spoke to Bloomberg said the kingdom’s infrastructure and defence systems have helped limit disruptions to business activity.

Airspace remains open, commercial operations are continuing, and economic activity has largely been maintained despite the regional tensions.

Saudi Arabia’s main short-term challenge could involve fiscal pressures if lower revenues widen the budget deficit in the early stages of the conflict.

According to analysts including Monica Malik at Abu Dhabi Commercial Bank and Azad Zangana at Oxford Economics, the kingdom could face a deeper first-quarter deficit.

Yet several economists expect Saudi Arabia’s fiscal outlook to improve if oil prices remain elevated.

Tim Callen, a visiting scholar at the Arab Gulf States Institute in Washington, estimates that Saudi Arabia’s budget deficit could shrink by about 1% if oil output averages 7.5 million barrels per day and Brent crude prices remain around $90 per barrel.

The Saudi government has forecast a deficit of 3.3% for 2026.

Elsewhere in the region, the UAE is still expected to post a budget surplus this year, while Qatar’s deficit could widen, according to Abu Basha at EFG Hermes.

GCC economies may increasingly turn to international debt markets to manage fiscal pressures if the conflict continues.

Despite geopolitical tensions, investors have so far shown limited concern about the financial outlook for the region.

Fady Gendy, a portfolio manager at Arqaam Capital, said bond markets are not currently pricing in a prolonged conflict.

“It’d be a concern if the conflict simmers on for a prolonged period, which is not what is currently priced into the market.”

- With inputs from Bloomberg