Gulf states must move faster to future-proof their economies

Iran’s unprovoked and illegal attacks on its Arab neighbors, until a shaky ceasefire was declared early Wednesday, drove home a point more significant than the immediate human toll.

For the member states of the Gulf Cooperation Council, and Iraq, the crisis caused by the Iranian missile and drone strikes is as much a geopolitical challenge as an economic eye-opener. The vulnerability of the world’s most critical energy corridor has been laid bare once again and the Gulf states’ window for economic transformation is going to narrow.

The shipping logjam in the Strait of Hormuz, exacerbated by Iranian threats to maritime traffic, has sent shock waves through international supply chains. The volatility is no longer confined to oil, with supply disruptions spreading to liquefied natural gas, fertilizers, helium and aluminum, among other commodities. For a global economy still recovering from inflationary pressures, Iran’s choke hold on this vital transport route, through which a fifth of the world’s oil passes, has emerged as an intolerable risk.

Iran’s targeting of energy and industrial sites across Saudi Arabia, Qatar, the UAE, Bahrain, Oman and Iraq cannot be dismissed as a mere “continuation of politics” by other means. Rather, it was a calculated assault by a frustrated regime that likely viewed the development models and growth stories of its Arab neighbors not just with envy but also as a systemic threat.

The global community’s response to Iran’s destabilization of the Gulf region will be to accelerate the search for ways to distance itself from geopolitical volatility in the Middle East.

Arnab Neil Sengupta

As noted by a recent report in The Wall Street Journal, these attacks appeared increasingly aimed at sectors central to diversification drives by energy-exporting Arab countries. From aluminum-manufacturing plants to advanced manufacturing hubs, the infrastructure of the region’s post-oil future found itself in Tehran’s crosshairs.

Whatever the logic behind the Islamic Revolutionary Guard Corps’ strategy, the takeaway is clear: Gulf states must move faster to future-proof their economies. The global community’s response to Iran’s deliberate destabilization of the Gulf region will not be simply to wait for peace. Rather, it will be to accelerate the search for ways to distance itself from geopolitical volatility in the Middle East. It should come as no surprise if the rest of the world seeks to aggressively reduce its dependence on natural gas and oil in an attempt to insulate itself from price fluctuations driven by distant conflicts.

In recent years, the world has witnessed a surge in fossil-fuel alternatives within the transportation sector, from the adoption of electric vehicles to ammonia-fueled shipping. This war is likely to provide a fillip to these technologies and make their adoption more economical. If the conflict ends without major change in Tehran, the push to reduce exposure to Middle East energy risks might accelerate sharply, especially in the developing world. To the international investor, a region under constant threat from mercurial regimes and malign actors is a region best bypassed.

To counter this, the Gulf must adopt a two-pronged strategy of pragmatism once the war is over. Firstly, regional cooperation must reach a level of integration that aims to reduce dependence on the Strait of Hormuz close to zero. This requires a massive, coordinated shift toward ports in the Gulf of Oman, Red Sea and Arabian Sea.

By expanding pipelines and transport links to hubs such as Yanbu in Saudi Arabia, Fujairah in the UAE, and Salalah and Duqm in Oman, the GCC can significantly reduce its reliance on the Strait of Hormuz. As the current crisis has demonstrated, true economic sovereignty today is measured by the number of exit points a nation controls.

Secondly, the Gulf countries and Iraq must double down on “energy-adjacent” sectors. The goal here is to utilize the region’s still-plentiful hydrocarbon reserves not as a combustible export but as feedstock for the high-value products the modern world needs.

This means transforming oil and natural gas into the massive computing power required for global data centers, and utilizing cheap energy to dominate the production of low-carbon aluminum and specialty chemicals.

The foundation for this already exists. Saudi Arabia has sharply increased the role of non-oil revenue since the launch of its Vision 2030 plan, while the UAE has successfully positioned itself as a global hub for trade and technology. Qatar has cemented its role as one of the world’s most important exporters of LNG, and Oman has made significant progress in the development of green hydrogen.

However, Iran’s hostile actions have proved that these bastions of stability and prosperity continue to be vulnerable to regional volatility.

The urgency of transformation is complicated by a shifting security landscape. It is no longer safe to assume the US will play the role of regional policeman going forward. If Gulf states are not increasingly integrated as indispensable investors and tech partners in the US economy, the appetite in Washington for military intervention will continue to wane.

The era of “oil for security” arrangement, though not quite dead, needs to be replaced by an era that could perhaps be termed an “innovation for security” partnership.

European allies of the GCC responded unevenly, with some keeping their distance and others offering more substantive, albeit defensive, support as the war raged on. Even within the broader Arab and Islamic world, institutions such as the Arab League and the Organization of Islamic Cooperation appeared to be paralyzed by internal divisions.

This geopolitical loneliness, as it were, of the Gulf states in a time of existential crisis has demonstrated that their security is significantly tied to their economic influence and indispensability.

The two-week ceasefire undoubtedly provides a respite from the destruction, but the world probably will not return to what it was before the US and Israel launched joint strikes against Iran on Feb. 28. There is no denying that the risk premium associated with the Gulf is being recalculated by boardrooms in London, New York and Tokyo, regardless of whether the wounded regime in Iran falls or remains in power.

The bottom line is this: Since the 1970s, Saudi Arabia, Kuwait, the UAE and Bahrain have shown that they can both imagine and build a bright future, both for their citizens and the noncitizens who come to the Gulf in search of a better life.

What is different now is the need for these states to prove they can protect this future from the geopolitical uncertainties inherent to the region.

Diversification should no longer be considered a visionary target or policy goal, but the only viable survival strategy in a region that has somehow flourished in the shadow of conflict since the eruption of the Iraq-Iran war in September 1980.

• Arnab Neil Sengupta is a senior editor at Arab News. X: @arnabnsg