The economies of several Gulf states are facing a prolonged period of economic strain and potential long-term damage due to the ongoing conflict with Iran. The repercussions have extended beyond immediate disruptions to energy markets, impacting vital sectors like tourism and potentially altering investment strategies.
In a stark illustration of the vulnerability, Qatar's massive natural gas complex at Ras Laffan was struck by an Iranian ballistic missile on March 18th. This attack, which targeted the primary hub for liquefied natural gas (LNG) exports, is estimated to have knocked out approximately 17% of global LNG supply. The state-owned QatarEnergy faces projected annual revenue losses of $20 billion (£15 billion) as a result of the damage, with repairs expected to take between three to five years. This incident has disrupted supplies to crucial Asian markets, including China.
The strike on Qatar's Ras Laffan complex followed an Israeli bombing of Iran's South Pars gas field, which shares a maritime border with Qatar's North Dome field. Together, these fields constitute the world's largest natural gas reserve, highlighting the interconnectedness and fragility of the region's energy infrastructure.
Estimates suggest that the continuing conflict has inflicted up to $58 billion in damage across the Gulf region. According to the International Energy Agency (IEA), over 80 facilities have been targeted since the US and Israel initiated strikes against Iran on February 28th, with more than a third suffering severe damage. Beyond Qatar, damage has been reported in Bahrain, Kuwait, Saudi Arabia, and the United Arab Emirates, collectively plunging the region into a significant economic shock.
The World Bank has revised its growth forecast for the Middle East downwards to 1.8% for the current year, attributing this revision to the war and warning of potential long-term economic "scarring." This represents a substantial decrease from its previous estimate of 4% growth for 2026. The bank specifically anticipates that Qatar and Kuwait will experience the most significant economic contractions.
Saudi Arabia and the United Arab Emirates have demonstrated a degree of resilience, largely owing to their oil exports that bypass the Strait of Hormuz, a critical shipping lane that Iran has threatened to close. However, the overall impact on Gulf states is considered severe, according to Justin Alexander, director at the consultancy Khalij Economics. He notes that the full extent of the damage is still difficult to ascertain while the conflict remains unresolved, emphasizing that a return to normalcy will take considerable time even if hostilities cease immediately.
The economic strain is exacerbated by the closure of the Strait of Hormuz, which typically handles about 20% of global oil and LNG shipments. This narrow passage is a vital economic artery for Gulf producers. Saudi Arabia has rerouted oil shipments to the Red Sea port of Yanbu via its East-West pipeline, while the UAE is utilizing its Fujairah pipeline to circumvent the strait. Nevertheless, these alternative routes collectively handle less than half of the volume that normally transits through Hormuz, leading the IEA to describe the situation as the "biggest energy crisis in history."
Qatar's finance minister has cautioned that the full economic consequences of the Iran war are yet to be fully realized. Bader Al Saif, a professor at Kuwait University and fellow at the think tank Chatham House, suggests that the crisis might compel countries like Qatar, Kuwait, and Bahrain to develop alternative pipeline networks for oil and gas transportation, reducing reliance on tanker ships and mitigating risks associated with single transit routes.
The economic fallout is not confined to the energy sector. Travel and tourism, a cornerstone of economic diversification for many Gulf nations, have been severely impacted. The World Travel & Tourism Council estimated in March that the Middle East was incurring losses of approximately $600 million daily in tourism revenues since the conflict began. The UAE, which has invested heavily in establishing itself as a global tourism hub, is particularly exposed, with businesses in Dubai's travel and hospitality sectors reporting substantial drops in bookings, an increase in cancellations, and reduced customer traffic, leading to job losses and unpaid leave.
Emerging signs also point to broader stresses within the financial system. In a development that underscored these concerns, former US President Donald Trump indicated that the US was considering extending currency swap lines to Gulf allies, including the UAE, to alleviate dollar liquidity pressures. Such arrangements would facilitate easier access to US dollars for central banks. However, the UAE has downplayed these suggestions, with its ambassador to the US, Yousef Al Otaiba, stating that any notion of the country requiring external financial backing "misread the facts."
In a related strategic move, the UAE announced its withdrawal from the Organization of the Petroleum Exporting Countries (Opec), a decision that grants it greater autonomy in managing its export levels. The UAE was the fourth-largest producer within Opec, an organization that collectively controls approximately 37% of global oil supply.
The wider Middle East region, including Gaza, Lebanon, and Syria, which rely on financial support from oil-rich Gulf states for economic reconstruction, may face reduced assistance. Gulf governments might need to divert resources towards rebuilding their own damaged economies. This potential shift in financial priorities could limit the availability of aid and investment for other nations in the region, according to Alexander.
The conflict also poses a threat to the economic diversification programs of Gulf nations. These countries are investing billions in sectors such as artificial intelligence, sports, and entertainment to lessen their dependence on oil revenues. Saudi Arabia and the UAE, in particular, have channeled substantial funds to establish themselves as regional hubs for AI and technology, aiming to attract skilled professionals. Some analysts are speculating whether these investments, particularly those in the United States, might be re-evaluated by Gulf countries.
Concerns persist that without a definitive agreement to end the conflict with Iran and secure guarantees for the unimpeded passage through the Strait of Hormuz, the economic strain on the Gulf states could intensify. "The Gulf states do have to prepare for perhaps an extended period of instability – an unresolved or low-intensity conflict within the region that may continue if there is no deal," stated Karen Young, a senior research scholar at Columbia University's Center on Global Energy Policy.
