Gulf economies face long-term fallout from conflict with Iran

In the early 1990s, Qatar was facing a period of economic pressure; High debt levels and weak state revenues have weighed on its public finances. In an attempt to change its economic trajectory, the small Gulf state has taken a decisive bet on natural gas.

It has decided to develop its huge reserves of offshore gas and, most importantly, to cool the gas to very low levels to convert it into liquefied natural gas (LNG) that can be transported by ship to the countries of the world.

This decision led to the construction of the Ras Laffan Industrial City on the coast, about an hour's drive from the capital Doha. And over the next three decades, it became the world’s largest LNG export hub, transforming Qatar into one of the world’s richest countries.

But on March 18, this success story was rocked violently.

An Iranian ballistic missile hit the main Ras Laffan gas complex, disrupting about 17% of global LNG supplies.

And the damage is expected to cause annual losses of about $20 billion for the state-owned Qatar Energy, along with disruptions to supplies to key markets in Asia, including China. Repair work may take between three to five years.

And Karen Young, a senior researcher at Columbia University’s Center for Global Energy Policy, says:

“The attack was a shock, not only to global energy markets, but also to the Gulf states themselves, which are feeling a great deal of fragility.”

And Qatar Energy CEO Saad al-Kaabi said the scale of the damage “set the region back 10 to 20 years.”

The Iranian strike came after Israel bombed Iran's South Pars gas field, which is connected to Qatar's North Field. Together, the two fields form the world's largest natural gas reserves.

And Qatar has become one of the world’s largest exporters of natural gas.

And across the Gulf, the continuing conflict with Iran has caused an estimated $58 billion in damage, according to one estimate.

According to the International Energy Agency, more than 80 facilities have been hit since the US and Israel launched strikes on Iran on February 28, and more than a third of these facilities have been severely damaged. And besides Qatar, damage has been reported in Bahrain, Kuwait, Saudi Arabia and the UAE.

This has led the region to a major economic shock.

And the World Bank cut its forecast for Middle East economic growth to 1.8 percent this year because of the war, warning that the fallout could lead to long-term “scars” in the economy.

And the bank had previously forecast 4% growth in 2026, noting that Qatar and Kuwait will experience the largest economic downturn.

"In contrast, Saudi Arabia and the UAE have shown greater resilience, mainly because they have some oil exports that do not pass through the Strait of Hormuz, which Iran has closed."

And Justin Alexander, director of Gulf Economics, a consultancy that studies the region, says the impact of the crisis on the Gulf states is “severe,” adding that it is difficult so far to fully assess the extent of the damage, because the conflict is still ongoing.

"Even if the war stops today, there will still be a big impact before things return to normal."

And the damage is not limited to energy infrastructure.

The closure of the Strait of Hormuz has led to a sharp decline in oil and gas exports, increasing economic pressures. And about 20% of global oil and liquefied natural gas (LNG) flows usually pass through this narrow corridor.

For Gulf producers, the strait represents their vital economic artery. And Saudi Arabia has had to rely on the East-West pipeline to transport oil to the Red Sea port of Yanbu, while the UAE uses the Fujairah pipeline to bypass the strait. But these alternatives together can transport less than half of the quantities that would normally pass through Hormuz.

And the head of the International Energy Agency called the situation “the biggest energy crisis in history.” Meanwhile, Qatar's finance minister warned that the full economic ramifications of the war with Iran have yet to emerge.

And the crisis could prompt countries like Qatar, Kuwait and Bahrain to develop pipeline networks as an alternative to oil and gas tankers, says Badr al-Saif, a professor at Kuwait University and a researcher at Chatham House.

And they can’t rely on just one route to transport oil and gas. Today the problem is with Iran, and tomorrow there may be another external threat.”

The economic fallout has also extended beyond the energy sector.

The travel and tourism sector — a cornerstone of several Gulf states’ economic diversification plans — has been hit hard. The World Travel and Tourism Council estimated in March that the Middle East has been losing about $600 million a day in tourism revenue since the war began.

And the UAE, which has spent decades building itself as a global tourism hub, has been one of the countries most under influence. Reports indicate a sharp decline in bookings at travel and hospitality companies in Dubai, along with cancelations and a decline in visitor numbers, resulting in job losses and unpaid leave.

There are also signs of broader pressures in financial systems. Last month, Donald Trump said the United States was considering expanding currency swap lines with its Gulf allies, including the UAE, to ease dollar liquidity pressures.

These arrangements allow central banks to obtain U.S. dollars more easily. The UAE downplayed the significance of these developments. Yusuf Al Otaiba, the UAE's ambassador to the US, said claims that his country needed external financial support were "misunderstanding the facts".

The UAE also announced its withdrawal from OPEC, giving it greater freedom to increase its oil exports. And it was the fourth-largest producer within the organization, which controls about 37% of global supplies.

And across the wider Middle East, Gaza, Lebanon and Syria will still need financial support from oil-rich Gulf states to rebuild their economies. But this support could come under pressure, as Gulf governments are forced to channel their resources toward rebuilding their local economies.

"The huge amounts of aid and investment that some countries in the region need may not be as readily available as expected," says Alexander.

The conflict could also affect economic diversification programs in the Gulf states, which are investing billions of dollars in sectors such as artificial intelligence, sports and entertainment to reduce their dependence on oil revenues.

Saudi Arabia and the UAE have poured billions of dollars into establishing themselves as regional hubs for artificial intelligence and technology, with the aim of attracting highly skilled talent.

And some analysts are wondering whether the Gulf states may be scaling back their investment in the United States. And those trillions and billions invested in the United States will be reassessed by some countries.”

Fears are also growing that unless a permanent agreement is reached to end the conflict with Iran, while ensuring that the Strait of Hormuz remains open, economic pressures could worsen further.

"The Gulf states must prepare for the possibility of a prolonged period of instability -- any unresolved or low-intensity conflict within the region that may persist if no agreement is reached," says Karen Young.