On the brink of war: How US-Iran tensions could impact Gulf economies

The increasing potential US military strike on Iran, amid escalating threats from President Donald Trump, is placing increasing pressure on the Gulf economy. Tehran has recently warned it will close the Strait of Hormuz, posing a significant risk to regional and global economic stability. Nearly 20% of global seaborne oil supplies pass through the strait, making its military and economic security a priority for Gulf states and their trading partners, including China, India, Japan, and South Korea.

Analysts in Europe and the US speculate that a closure of the Strait of Hormuz could push oil prices above $120 a barrel, triggering an economic shock comparable to the 1970s oil crisis. In the short term, shipping insurance costs are already rising sharply, with war risk premiums jumping from 0.2–0.3% to 0.5% for shipments to the Gulf, adding tens of thousands of dollars per voyage, according to a Washington Institute report.

The Gulf's economic fragility amplifies the impact of any military escalation.

Saudi Arabia, the UAE, Kuwait, and Qatar rely heavily on oil and gas exports for foreign currency, but their export capacity is limited. Saudi Arabia's East-West pipeline handles 5 million barrels daily, the UAE's Habshan-Fujairah line 1.5 million, while 15–21 million barrels pass through the Strait of Hormuz each day. A closure would trap most exports, worsening government budget deficits, particularly in Saudi Arabia, where the World Bank projects a 5.6% fiscal deficit in 2026, according to energy and maritime risk reports.

These risks directly affect foreign direct investment, a key driver of economic diversification. An EY study noted that 39% of international investors now list geopolitical tensions among the top three risks to Gulf investments over the next three years, up from 31% the previous year. Investment in the energy and logistics sectors could decline if the crisis escalates, threatening long-term diversification plans under Saudi Arabia's Vision 2030.

However, analysts at Kepler note that Iran's threats may remain limited to rhetoric. Iran would suffer severe economic losses from closing the Strait, as 40% of China's oil imports pass through Hormuz and Tehran relies heavily on Beijing as a key political and economic partner. Iran currently exports around 3.4 million barrels daily.

Turning point

Political economy expert Raed Al-Masri told The New Arab that current geopolitical developments mark a critical turning point for Gulf economic policy, particularly given agreements with the US under Trump.

US policies driving the region toward confrontation threaten vital maritime routes like Hormuz and Bab el-Mandeb, increasing the risk of open conflict with Iran. Fleet mobilisations and military rhetoric directly harm energy security and global supply chains, raising energy costs at multiple levels.

Al-Masri noted that Gulf states, whose budgets depend on fixed oil and gas benchmarks, face an existential financial threat from Trump-era policies that undermine strategic agreements and maritime security, lifelines for their economies.

He added that Iran's geopolitical presence is significant regardless of political relations, influencing calculations of major powers, especially the US, which aims to destabilise Iran for both ideological and strategic trade reasons, targeting competitors such as China and Russia.

This rivalry indirectly affects the Gulf states, despite their efforts to contain escalation. Al-Masri stressed the importance of Arab and Islamic diplomatic efforts to prevent or delay a potential US strike.

He also urged Gulf states to broaden global economic and political ties to reduce reliance on a single power and avoid appearing overconfident, which could provoke more aggressive US policies.

He concluded that these developments pose serious threats to the Gulf economy, maritime security, oil price stability, and the effectiveness of strategic agreements, particularly given hundreds of billions in financial commitments to the US.

Growing Economic Erosion

Political economy expert Mustafa Youssef told TNA that US statements on being at the "brink of war" with Iran immediately impacted gold prices, which surged above $5,300 an ounce amid global uncertainty.

He attributed this to eroding confidence in the dollar due to Trump's policies, including pressure on Federal Reserve Chair Jerome Powell over interest rates, threats of a military strike on Iran, and tensions with allies such as the UK, Germany, France, the Netherlands, and Canada.

Youssef added that these policies have prompted Western states to shift economic alliances, notably strengthening ties with China and deepening fragmentation in the Western financial system.

He pointed out that investors increasingly seek safe assets such as gold or investments insulated from US policy.

Therefore, according to Youssef, Gulf states are not immune: their currencies are pegged to the dollar, and sovereign wealth funds that are heavily invested in US financial assets are directly affected by potential market declines stemming from rising tensions.

If the crisis with Iran escalates, it could cause major losses, threatening Gulf economic diversification plans that rely on financial and investment stability.

Youssef called on GCC states to partially divest from US-linked assets and diversify their partnerships with China and independent European countries to achieve a strategic balance.

He emphasised that such measures are no longer optional, but necessary to protect long-term Gulf economic interests amid a volatile global system.