The Costs of the Iran Conflict for the Gulf

In short order, the U.S.-Israeli war against Iran has expanded across the region, with Gulf states bearing the brunt of Tehran’s retaliatory campaign aimed at dispersing the costs of the war and pressuring Washington to halt its offensive. This has included targeting energy infrastructure, shipping routes and aviation networks, threatening not only regional stability but the economic and reputational capital that Gulf states have painstakingly built over decades.

A Critical Moment

The war came at a moment of global economic fragility. The second Trump administration had already injected significant uncertainty into the international economic system through erratic tariff policies and a coercive, unilateral foreign policy posture that has unnerved both allies and adversaries. The global economy continues to grapple with persistent inflation, elevated interest rates, and supply chain disruptions stemming from the Red Sea crisis triggered by Houthi attacks linked to the Gaza genocide. Now both of the world’s most critical maritime chokepoints—Bab el-Mandeb and the Strait of Hormuz—are under threat.

For the world, the implications are severe. Energy prices are surging, transport routes are disrupted, and recession risks are rising. The United States faces renewed cost-of-living pressures and mounting debt concerns. Europe risks another energy crisis amid already weak growth. China may prove relatively more insulated due to internalized supply networks and months of strategic oil reserves, but is still vulnerable.

For the Gulf Cooperation Council (GCC) states, the timing is particularly inopportune as they are in the midst of the most consequential economic transformation programs in their modern histories. Their “Vision” strategies, already fragile, are based on the premise that they can leverage hydrocarbon wealth, geographic centrality and expanding domestic markets to attract foreign capital and talent, diversify away from oil exports, and build world-class service- and knowledge economies. That premise ultimately rests on the perception of stability, which the events of the past days have put under severe, and perhaps lasting, strain.

Channels of Economic Damage

The most immediate shock has been to global energy supply. The Strait of Hormuz—the maritime bottleneck through which roughly 20 percent of global oil and LNG exports pass, not to mention about 16 percent of global fertilizer—has effectively closed following Iranian warnings and attacks on multiple tankers. Vessel tracking data indicate tanker traffic has stalled completely, with roughly 500 ships anchored in open Gulf waters rather than risk transit. Insurers cancelled war risk coverage for ships attempting passage. With disruptions at Bab el-Mandeb, the Gulf’s integration into global trade networks has severed at both ends.

Meanwhile, Iran has damaged QatarEnergy’s facilities at Ras Laffan and Mesaieed Industrial City—prompting the world’s largest LNG producer to halt production entirely—Saudi Arabia’s most important refinery, Ras Tanura, and oil facilities in the UAE. Consequently, oil prices jumped 13 percent by March 3, while European natural gas futures soared by more than 40 percent. Analysts warn that if the conflict persists, Brent crude could climb above $120 per barrel. A sustained closure of Hormuz could push prices toward $200—levels widely seen as near-guaranteed to trigger a global recession.

The Gulf’s aviation sector—another pillar of regional economic strategy—has also been heavily disrupted. Dubai International Airport, the world’s busiest hub for international passenger traffic, suspended operations indefinitely following strikes on the Jebel Ali port area. Abu Dhabi’s airport suffered a fatal incident, while Kuwait International Airport sustained drone damage to its passenger terminal. Qatar suspended all air navigation and grounded the Qatar Airways fleet.

Unlike during the June 2025 war, all GCC states have experienced airspace closures simultaneously, shutting down tourism during Ramadan season, and inflicting expected losses of $40 billion. Videos of explosions in Dubai, Doha and Manama—and stranded tourists attempting long overland escapes—have pierced the Gulf’s carefully cultivated image of security. For the UAE and Qatar in particular, whose flagship carriers are pillars of national economic strategy, the shutdown represents a direct hit to two of the region’s most valuable economic assets.

Financial markets have responded with volatility. UAE exchanges halted trading for two days as banking and real estate stocks—highly sensitive to geopolitical risk—fell sharply across the GCC. Digital infrastructure has not been spared, as Amazon’s data centers in the UAE and Bahrain reported prolonged outages, forcing delivery services to be suspended across several states.

The symbolic damage is equally significant. Iranian strikes hit a luxury hotel on Dubai’s Palm Jumeirah, residential towers in Manama, and U.S. diplomatic missions in Riyadh, Kuwait and Dubai. In a region whose soft power is inseparable from its reputation as a sanctuary of stability, such images carry consequences that cannot be measured by any immediate economic metric.

Scenarios, From Bad to Catastrophic

The war is now several days old with no credible off-ramp in sight. Trump has suggested the war may last “up to five weeks” or longer, and has floated the idea of deploying ground troops, signaling the depth of the administration’s commitment. Trump is caught in a deeply unpopular war initiated by his deeply unpopular administration without a face-saving way out, while Iran’s wartime leadership has made clear it sees little prospect for negotiations under American pressure.

Three broad economic trajectories now merit consideration.

In an optimistic case, there is a rapid de-escalation within ten days through a negotiated resolution. Physical damage would be severe but recoverable. Hormuz would reopen quickly, energy prices would retreat, GCC markets would stabilize within months. Investment flows would slow but not permanently shift, while reputational damage would be real but manageable. This is the least likely scenario.

If the conflict lasts four to six weeks with intermittent closure of Hormuz, sustained attacks on Gulf infrastructure and prolonged aviation closures, the economic costs escalate sharply. Oil prices could remain above $100–120 per barrel. Gulf energy exporters would not be able to get their goods to market, and prices would skyrocket as a result. The IMF and World Bank would likely revise global growth projections downward; central banks in the U.S. and Europe would face an inflationary impulse at a moment when policy rates are already elevated. This scenario would set back GCC diversification programs by years, not months. This is the most likely scenario.

An even more pessimistic scenario is a protracted war in which Iran successfully closes Hormuz, activates its regional militia network, and provokes GCC military involvement, which would have incalculable consequences. The removal of roughly one-fifth of global oil supply would constitute a shock without modern precedent. For Gulf countries already expecting widening fiscal deficits, the combination of infrastructure damage, collapsing investor confidence and emergency military spending would create genuine fiscal distress.

Long-Term Consequences: The Transformation at Risk

Even short of a catastrophe, however, the conflict threatens lasting damage to the Gulf’s economic ambitions. Hydrocarbon importers may hedge against the Gulf if perceptions of supply risks persist. Moreover, diversification programs depend heavily on sustained inflows of foreign capital, which are directed where investors believe stability will endure. A region repeatedly exposed to missile and drone attacks risks that perception.

Military spending across the GCC will almost certainly surge as governments reassess their security assumptions. The war has exposed both the limits of U.S. protection and the vulnerability of advanced infrastructure to relatively inexpensive weaponry. Rising defense budgets will potentially cannibalize investment in diversification programs.

The expatriate labor model may also face pressure. Gulf economies rely on foreign professionals and investors whose mobility allows them to relocate quickly when security deteriorates. The sight of Gulf cities under attack—and evacuation orders from foreign governments—will inevitably affect those calculations, including longer-term. Indeed, the stability, safety and prosperity of the Gulf—more than any single economic indicator—has been central to their success in becoming global hubs, and the past few days have shaken that narrative.

What Should the GCC Do?

In the immediate term, GCC states should work collectively to prevent further escalation on their territory. They retain leverage, through U.S. basing access and diplomatic channels to Tehran and Beijing, that must be used to push for a ceasefire. A GCC diplomatic initiative coordinated with other global powers could create an off-ramp neither Washington nor Tehran can easily construct alone.

In parallel, GCC states should activate their strategic hydrocarbon reserves and infrastructure to mitigate global supply shock. Emergency fiscal coordination and expanded intra-GCC logistics cooperation could help limit the structural damage to diversification programs. Just as the 12-day war brought GCC members closer together, the current conflict may have a salutary effect of attenuating the escalating cold war between Saudi Arabia and the UAE.

But economic emergency measures alone will not suffice. If the underlying causes of the war remain unresolved, similar crises will recur. Over the medium term, the Gulf’s most important investment would be a credible regional security architecture—one less dependent on U.S. extended deterrence and better equipped to deal with Iran, while also containing an increasingly far-right and belligerent Israel.

Economically, the GCC will also need to strengthen resilience: expanding strategic reserves, building redundant, war-proof energy and logistics networks, onshoring critical industries, and accelerating diversification away from hydrocarbons that remain vulnerable to maritime chokepoints.

The war has exposed the fragility beneath the Gulf’s economic transformation. Whether that transformation survives intact may depend on how quickly the region adapts to a far more dangerous strategic landscape.