Beyond Oil: How Prolonged Regional Conflict Reshaped Gulf Economies

When the US war with Iran began in late February, prevailing economic assumptions dictated that oil prices would surge, financial markets would experience volatility, and Gulf economies would face merely a temporary shock before swiftly recovering. Five months later, those initial assumptions have proven remarkably shortsighted. While initial concerns centered on a short-lived oil price shock, the greater threat has materialized as the disruption of the Gulf's capacity to export energy, import goods, and operate normally through the Strait of Hormuz. This distinction remains vital because higher oil prices typically benefit Gulf producers, whereas prolonged interruptions to oil and gas exports actively harm them.

The World Bank illustrated the shifting scale in April by cutting its 2026 Gulf growth forecast from 4.4 per cent to just 1.3 per cent. By July, economic outlooks deteriorated further. A Reuters survey of economists projected contractions of 8.1 per cent in both Kuwait and Qatar, 5.1 per cent in Bahrain, and 0.5 per cent in the UAE, while Saudi Arabia and Oman were anticipated to maintain positive territory due to possessing more diversified export routes. Ironically, oil prices have failed to remain at the extreme levels feared at the onset of the conflict, with Brent trading at approximately $84 a barrel on August 10, well below fears of prolonged disruption pushing prices toward $120-$150.

This reality has fundamentally altered the economic calculation. The primary problem for the Gulf is no longer just the height of oil prices, but whether hydrocarbons can be produced, transported, and sold. Early forecasts assumed the Strait of Hormuz would reopen relatively quickly, with the IMF's July outlook projecting reopening by mid-July and a return to normality by March 2027. However, that timeline proved overly optimistic. Negotiations involving Iran and Oman over reopening the strait remain uncertain, with Iran demanding significant concessions from the US. Furthermore, renewed attacks, including a claimed Houthi strike on a Saudi Aramco refinery, demonstrate that the conflict retains the capacity to spread beyond the immediate theatre of war.

This dynamic has driven a second major shift in market expectations, with financial sectors increasingly pricing in duration and uncertainty rather than the probability of a swift resolution. Accumulated shipping costs, insurance premiums, supply chain disruptions, postponed investments, and weakened consumer confidence have proven far more damaging than the initial oil price spike. The past five months also highlight stark differences in how individual Gulf economies have been impacted. Qatar and Kuwait remain exceptionally vulnerable due to their heavy dependence on energy exports through Hormuz, whereas Saudi Arabia benefits from its East-West pipeline infrastructure, and Oman maintains ports situated outside the strait. Although the UAE features alternative export infrastructure, its status as a global logistics, aviation, tourism, and financial hub leaves it exposed to broader regional disruptions. Nevertheless, the UAE has exhibited considerable resilience, with non-oil private-sector activity accelerating in July as new orders and exports strengthened, illustrating how diversification has reduced economic dependence strictly on oil production.

Emerging consensus reflects less pessimism regarding the medium-term GCC outlook compared to the darkest months of the conflict, though caution persists for the near term. The IMF's July forecasts indicate a sharp rebound in 2027 for economies whose energy exports and transport networks manage to recover, with Saudi Arabia projected to shift from 1.7 per cent growth in 2026 to 5.5 per cent in 2027. As Tim Fox noted, if disruption persists, the narrative could shift from a V-shaped recovery to a prolonged U-shaped one, making economic damage a matter of disrupted timing rather than permanent destruction. Ultimately, the lasting legacy of the war is that the Gulf will emerge with a heightened awareness of the economic risks tied to geographical concentration, accelerating investments in alternative logistics, storage, domestic production, and supply-chain resilience.