U.S.-Iran Conflict Could Devastate Gulf States’ Economies

Tensions in the Middle East are at a fever pitch, after a U.S. drone attack killed Iranian general Qasem Soleimani, in Baghdad on Friday. Iran has pledged to retaliate against the United States, while U.S. President Trump threatened to hit 52 Iranian targets in response to any attack on U.S. assets by Tehran. With risk apprehension soaring, Brent crude prices briefly pushed above $70 on Monday, a level last seen in May 2019. Although crude prices have retracted slightly, some analysts have raised the scenario of oil prices hitting $100 a barrel.

At first glance, higher oil prices would appear to be a boon for the Gulf States, whose revenue is almost entirely based on oil exports. However, the realities of geopolitics interfere with this rosy outlook. A conflict between Iran and the U.S. would threaten oil exports from the Gulf countries, as tankers laden with Gulf oil must travel through the narrow Straits of Hormuz. Iran has repeatedly threatened to close this vital waterway, which would lead to a severe disruption in the supply of global oil. Tehran (or its proxies) could also target Gulf oil facilities. An attack on a Saudi oil terminal in September, which was widely blamed on Iran, disrupted Saudi oil production for several weeks. Another possibility is that Iran could target U.S. military bases in the Gulf, such as the headquarters of the U.S. Fifth Fleet, which is based in Bahrain.

The Gulf nations and Iran already have an uneasy relationship, and any escalation in the conflict between Washington and Tehran could have a severe impact on the Gulf economies. Oil prices could soar, but that would be of little to comfort to the Gulf states if Iran closed the Straits of Hormuz and prevented these countries from exporting their oil.