The article was first published on OMFIF on March 17th, 2026.

Yara Aziz is Senior Economist at OMFIF.

Deeper impacts of conflict will be felt beyond short-term oil price volatility

The Gulf Cooperation Council economies entered 2025 in a position of notable strength. High hydrocarbon revenues, expanding sovereign wealth portfolios and sustained diversification programmes had improved fiscal balances across Saudi Arabia, the United Arab Emirates, Qatar, Kuwait, Bahrain and Oman. Yet the escalation in tensions between Israel and Iran in 2025, followed by a wider regional war in 2026, has exposed the limits of that resilience.

For GCC economies, geopolitical shocks are transmitted not only through oil prices, but also through trade routes, shipping costs, food and industrial input chains, and shifts in investor sentiment. The aftermath of conflict therefore raises a broader economic question: how far can the Gulf’s recent economic gains withstand prolonged regional instability?

The region’s economic architecture places it at the centre of global energy supply and international capital markets. As the world’s largest concentration of hydrocarbon exporters, GCC economies remain deeply embedded in global energy systems even as diversification efforts gather momentum. When tensions rise in the region, markets respond quickly. Oil prices soar as supply risk premiums widen, shipping insurance costs increase and financial markets reprice geopolitical exposure. The immediate effects are visible in commodity markets within days. The more important consequences, however, emerge over a longer horizon.

Immediate effects on energy markets and financial flows

Wars in the Middle East have historically amplified volatility in global energy markets. The Israel-Iran confrontation in 2025 offered a clear example. Israeli strikes on Iranian infrastructure curtailed Iran’s oil exports during the conflict, underlining both the fragility of regional supply chains and the sensitivity of global markets to geopolitical risk. Although that episode subsided relatively quickly, it reinforced a structural reality: the Gulf remains the world’s most important energy corridor, and disruption in the region carries global macroeconomic consequences.

That vulnerability became more visible in 2026 when the broader war between Israel, Iran and their respective allies triggered a crisis in the Strait of Hormuz. The waterway, situated between Iran and Oman, handles a significant share of global oil and liquefied natural gas trade. Heightened security risks, threats to shipping and repeated disruption to tanker traffic forced energy companies to delay, reroute or suspend shipments. The resulting uncertainty moved rapidly through global energy markets. Brent crude prices climbed above $100 per barrel as supply fears intensified and production shutdowns spread across the Gulf.

Liquefied natural gas markets also tightened, particularly in Europe and Asia, where reliance on Qatari exports remains considerable. Yet for GCC states, this produced a paradox. Higher oil prices would ordinarily strengthen fiscal revenues and improve sovereign balance sheets. In many cases, price spikes generate windfall revenues that can support public investment and diversification. But when higher prices are driven by conflict that threatens export routes and energy infrastructure, the gains are offset by operational risks, shipping delays and logistical constraints.

Financial markets reflected this tension. Sovereign spreads across emerging markets widened as investors reassessed geopolitical exposure. GCC issuers, however, proved more resilient than many peers. Strong external balances, substantial foreign reserves and sizeable sovereign wealth assets provided an important cushion against volatility.

Transmission channels into GCC economies

The economic transmission mechanisms extend beyond commodity prices. The most important channel runs through the Strait of Hormuz itself. Despite efforts to diversify export routes, a large share of Gulf energy exports still passes through this narrow maritime corridor. Saudi Arabia and the UAE possess alternative pipeline routes that reduce reliance on the strait, but these cannot fully replace maritime shipments. Others, particularly Kuwait, remain even more dependent on the route, leaving export capacity highly exposed to disruption.

The effects have been tangible. Insurance premiums for tanker transit have risen, shipping delays have become more frequent and the risk to regional infrastructure has complicated logistics across global supply chains. The shock is not confined to energy. Disruptions to fertiliser trade, shipping costs and industrial inputs risk feeding through into food prices, a particular concern for highly import-dependent Gulf economies operating under structural water constraints. Even if hostilities ease, damaged infrastructure, reduced shipping confidence and disrupted trade flows can persist.

Another transmission channel runs through fiscal policy and sovereign wealth management. Higher oil prices can temporarily strengthen government revenues across the Gulf, providing room to sustain capital spending, industrial policy and social expenditure. Sovereign funds also play a central role. Institutions such as the Abu Dhabi Investment Authority, the Public Investment Fund and the Qatar Investment Authority can use periods of volatility to preserve liquidity, rebalance portfolios and take advantage of dislocated asset prices abroad.

Medium-term structural implications

Beyond the immediate market reaction, prolonged instability may influence longer-term shifts in global energy markets. Major consuming economies have increasingly sought to diversify supply sources to reduce exposure to disruption in the Gulf. That does not diminish the region’s importance. The GCC still holds some of the world’s largest and lowest-cost hydrocarbon reserves and remains central to global energy security, particularly for Asia.

Even so, persistent volatility may accelerate efforts by importers to broaden supply networks and reduce dependence on a single corridor. Recent US moves to reopen access to Venezuelan crude after Nicolás Maduro’s removal also point in the same direction, underscoring how major importers may seek alternative supply options when instability in the Gulf threatens global flows.

For the GCC, this reinforces the case for diversification at home. Programmes such as Saudi Arabia’s Vision 2030 and the UAE’s expansion into technology, logistics and renewable energy are not simply growth strategies. They are increasingly part of a resilience strategy. The lesson from 2025 and 2026 is not only that high oil prices can deliver fiscal gains, but that concentrated export dependence remains a structural vulnerability.

Policy considerations for the region

For policy-makers across the GCC, managing the aftermath of regional conflict means balancing short-term fiscal gains against longer-term structural risks. Elevated energy prices may support revenues, but volatility underscores the importance of prudent fiscal frameworks and cautious expenditure planning.

Investment in alternative export infrastructure is one response. Expanding pipeline capacity and strengthening routes that bypass Hormuz would reduce vulnerability over time, even if such measures cannot remove it entirely. Regional co-ordination also matters. Greater co-operation on maritime security, energy infrastructure protection and trade logistics would improve resilience to future disruptions. At the same time, continued investment in non-hydrocarbon sectors remains essential if the region is to reduce its exposure to commodity and transit shocks.

Looking ahead, geopolitical shocks in the Middle East inevitably echo through the global economy. For GCC economies, the immediate consequences appear in energy markets and export logistics, while deeper effects emerge through investment patterns, fiscal strategy and long-term planning. The region’s financial buffers provide some insulation against short-term volatility.

Yet the events of 2025 and 2026 have shown that Gulf prosperity remains closely tied to the stability of global energy trade routes. Strengthening diversification, expanding export redundancy and maintaining prudent fiscal management will therefore remain central to the region’s long-term economic resilience.