By: Salman Rafi Sheikh -
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- In Xanadu did Kubla Khan… Photo from Times of Israel The Arab Gulf’s glittering skylines were built on a simple promise: stability in exchange for prosperity. That bargain is now under strain. As regional tensions escalate and the specter of a prolonged war looms, the region’s oil-rich monarchies find themselves caught in a strategic vise with no easy escape. Whether Iran emerges weakened or emboldened, the consequences for the Arab Gulf will be profound and potentially destabilizing. What once appeared to be a model of resilient statecraft is beginning to show cracks. Security Without Certainty Beneath the façade of luxury and growth lies a deeper vulnerability: an economic and political system heavily dependent on external stability that no one can guarantee anymore. Gulf monarchies have long walked a delicate tightrope, balancing Iranian rivalry, alliances with Western powers and a delicate détente that allowed their economies to flourish. Active hostilities linked to the ongoing US-Israel-Iran conflict have shattered that balance. As Asia Sentinel reported on March 10 , all of the small sultanates except Oman are mainly occupied by foreigners, who comprise even 44 percent of the Saudi population and run as high as 88 percent in Qatar and the UAE. They are workers or expatriates looking for a tax haven with no commitment to their states. Many have already fled or sought to. Should hostilities persist, more will do so, many permanently, creating labor shortages, slowing construction, destroying housing and consumer markets and creating other problems.
Across the Gulf, from the United Arab Emirates to Saudi Arabia, drone and missile strikes have targeted critical energy infrastructure, airports, and military bases, eroding the image of fortress‑like stability. -
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- Which one next? NYT Photo Reports indicate Dubai’s real estate sector, a bedrock of the UAE’s standing as a global investment magnet, is receiving a major hit. The uncertainty has eroded tourism. If Iran were to become another Iraq or Syria, fragmented into warring camps, it would become a permanent source of instability. If geography had been central to the success of high-flying airlines like Emirates, Qatar and Etihad, it has now become their greatest curse .
The locus of petrodollar-dependent monarchies is the Strait of Hormuz, a 104‑mile waterway between Iran and Oman that has historically handled about 20 percent of global oil and LNG trade. Exports through the Strait have collapsed by at least 60 percent as the hostilities intensify, preventing millions of barrels of oil per day from reaching global markets. The International Energy Agency has even described a prolonged closure as the “greatest global energy security threat in history.. In response, Gulf states such as Saudi Arabia have been forced to redirect crude via alternative routes such as the East‑West pipeline to the Red Sea port of Yanbu , surging shipments to nearly 4 million barrels per day as of March 2026. Yet these reroutes, while mitigating losses, underscore how dependent Gulf exports are on the strait’s security. They are an imperfect remedy for a strategic rupture.
For Gulf monarchies, this brings two unsettling realizations. First, external security guarantees, long the bedrock of regional defense, haven’t deterred cross‑border threats. Second, proximity to ongoing war means even indirect conflict can ripple into domestic disruption. As regional frontlines inch closer, ruling elites must reckon with a security landscape that no longer adheres to old assumptions. Diversification Under Duress The economic model that underwrites Gulf monarchies is no longer just about oil; it’s about perceptions of safety and seamless connectivity. Over the past decade, the states invested heavily in diversifying their economies, expanding sectors like tourism, finance, real estate and global logistics. But such diversification depends fundamentally on security and stability. Tourism and property markets are two flagship symbols of diversification. Cities once boasted record international arrivals and surging property prices, with Dubai recording 19.59 million visitors in 2025.
That narrative has been shaken. Airports were closed and civilian infrastructure was hit during recent strikes, casting doubt on the reliability of the Gulf aviation and hospitality sectors. Property markets are also sensitive to geopolitical risk. Uncertainty around the conflict has slowed investor confidence and transaction velocity – a crucial indicator in a market highly dependent on international capital flows. The broader regional trend, as some analysts point out, is that the allure of “safe haven” real estate is losing potency when geopolitics intrudes on everyday economic indicators.
The shock extends into trade, insurance, and global supply chains. Disruption in the Strait of Hormuz raises shipping costs and insurance premiums for vessels transiting one of the world’s key maritime corridors. Such increases feed directly into business costs, slowing logistics, freight flows, and the attractiveness of Gulf ports as commercial hubs.
Last but not least, falling investor confidence has macroeconomic implications. The Gulf states have relied on foreign direct investment as a cornerstone of post‑oil economic strategy. But when investor sentiment shifts, capital allocation follows. The present war has dealt a blow to the narrative that the Gulf is insulated from regional turbulence, a narrative upon which foreign investment flows were predicated.
Together, these factors suggest that the economic shock from conflict isn’t a short blip. It is structural stress that undermines the underlying assumptions of Gulf growth strategies. If sustained, it could reverse much of the progress made toward diversified, sustainable growth. A Social Contract Under Pressure The Gulf states’ enduring political stability is rooted in a subtle but powerful social contract: economic safety for its nationals in exchange for political acquiescence. Rulers have leveraged oil wealth into generous public services, subsidized utilities, job creation and social welfare, dampening the space for political dissent. Diversification complicates this contract. When the public sector can no longer absorb jobs at historical rates, and when non‑oil sectors falter due to geopolitical risk, the economic cushion weakens. Fiscal pressures induced by war, including the perpetually rising cost of enhanced defense postures, higher security expenditures, and lost non‑oil revenue, add another dimension.
This intersection of economic pressure and shifting social expectations creates fertile ground for political discontent. When prosperity slows down and the costs of instability rise, memories of past privileges do not insulate populations from frustration. In this context, the Gulf faces a paradox: its wealth provides the tools to absorb shocks, but those same tools foster dependency and risk complacency. A prolonged conflict, or even the perception of long-term vulnerability, risks awakening latent social pressures—youth unemployment, rising expectations, and generational frustration—that have been quietly simmering beneath the surface. Unlike earlier eras, when oil revenues alone could buy stability, today’s Gulf must confront a more complex equation: economic resilience, political legitimacy, and regional power are now inseparably intertwined, and none can be assumed.
The future may no longer be determined by strategic calculus alone. Instead, it will hinge on the monarchies’ ability to navigate uncertainty without collapsing the economic and political frameworks on which their authority has rested for decades. Failure to do so could transform the Gulf from a region long admired for its wealth and spectacle into one where political fragility and economic vulnerability are inseparable, leaving monarchies to confront challenges they have never faced before. Dr. Salman Rafi Sheikh is an Assistant Professor of Politics at the Lahore University of Management Sciences (LUMS) in Pakistan. He is a long-time contributor on diplomatic affairs to Asia Sentinel.