Dubai — A sudden escalation in hostilities between Iran and Israel is rippling across Middle Eastern economies, threatening to undercut growth prospects for several long-time U.S. partners, according to regional officials and market data reviewed Wednesday.
Brent crude briefly topped $95 a barrel in Asian trading, its highest in six months, after Iranian drones targeted Israeli military sites late Tuesday and Tehran warned it could disrupt shipping in the Strait of Hormuz. Energy-importing allies such as Jordan and Egypt face a double hit from pricier fuel and reduced tourist traffic, analysts said.
“If Brent stays near $100 for any length of time, the subsidy bill for several governments balloons overnight,” said Farah Husaini, senior economist at Abu Dhabi-based Gulf Analytics. She estimated that every $10 increase in crude slices about 0.3 percentage points from Egypt’s projected 2024 GDP growth.
Equity investors reacted swiftly. Saudi Arabia’s Tadawul All Share Index fell 2.3 percent on Wednesday’s open, while Kuwait’s Premier Market slipped 1.9 percent. Sovereign credit default swaps for Bahrain and Oman widened to three-month highs, according to S&P Global Market Intelligence.
Fiscal planners are already testing worst-case scenarios. A senior Gulf diplomat told SourceRated that Kuwait and Bahrain have instructed ministries to prepare “contingency budgets” based on oil at $80 but shipping volumes down 20 percent should the Strait be partially closed. The diplomat spoke on condition of anonymity because the discussions are private.
Security costs are also mounting. The Pentagon confirmed a weekend drone attack on a U.S. logistics hub in eastern Syria that injured three service members, underscoring risks for American troops positioned to protect regional trade routes. “Any sustained uptick in militia activity will require additional force protection spending,” a U.S. defense official said.
Last week the International Monetary Fund warned that a protracted conflict could shave a full percentage point off collective Gulf GDP this year, even for major oil exporters, because of deferred investment and tighter global financial conditions.
Looking ahead, economists say the next OPEC+ policy meeting in early April will be pivotal. “If Saudi Arabia signals it will compensate for any Iranian supply disruption, that could cap prices and calm markets,” said Maria Cheng, head of commodities research at Nomura. For now, traders are bracing for more volatility as energy, security and diplomatic shocks continue to reverberate well beyond the battlefield.