Gulf Economies Face Crippling Fallout from US-Israel War with Iran

Around two weeks into the American and Israeli war with Iran, Gulf economies are absorbing significant financial fallout as the conflict disrupts energy flows, increases defense costs, and erodes investor confidence. The situation threatens the Gulf states’ carefully cultivated image as havens of stability and prosperity.

Economic Impact of the Conflict

Iran’s retaliation against American military bases and Gulf Arab states, including attacks targeting hotels, airports, and energy infrastructure, is proving costly. The de facto closure of the Strait of Hormuz is a particularly acute concern. Al Jazeera reports that Gulf states are facing a fracturing of their economies due to the conflict.

Oil prices have surged, topping $100 a barrel, despite President Trump’s assertions that the war will finish soon and announcements of major oil reserve releases. CBS News indicates ship traffic remains largely stopped in the Strait of Hormuz, though the U.S. Navy has offered to escort oil tankers.

Threat to Regional Stability and Investment

The attacks and resulting imagery of damage to infrastructure are challenging the perception of security and prosperity that Gulf states have worked to build, particularly attracting expatriates seeking stable employment and favorable tax conditions. TIME highlights that a prolonged war risks unsettling investors and eroding the Gulf’s reputation for stability.

The social contract between Gulf rulers and their populations—both nationals and expatriates—relies on the guarantee of livelihoods, comfort, and security. The current situation puts pressure on this arrangement, requiring rulers to reassure the public.

Defense Spending and Security Challenges

Gulf states are facing a great security challenge, necessitating increased investment in defense capabilities. The Middle East Council on Global Affairs notes that Gulf investments in air and missile defenses have enabled regional states to absorb Iranian attacks and maintain strategic restraint.

Recent Developments

As of March 13, 2026, a U.S. Aerial refueling tanker involved in the military operation in Iran crashed in western Iraq, resulting in four fatalities. CBS News reports that rescue operations were underway for the remaining two crew members.

Ayatollah Mojtaba Khamenei, the new Supreme Leader of Iran, stated Iran should continue leveraging its control over the Strait of Hormuz and vowed to continue attacks on targets in Gulf Arab nations. CBS News

Looking Ahead

Even if the war ends soon—which currently appears unlikely—the Gulf Arab states will grapple with its implications for years to come. The economic, political, and military costs are already significant and mounting daily, posing a substantial risk to the region’s stability and prosperity.