In January 2022, ANBOUND’s founder Kung Chan made the following prediction: the conflict-ridden countries in the Middle East face the dangerous prospect of losing order. The primary rationale behind this prediction made seven years ago was that, as the United States gradually becomes unwilling to bear the risky responsibility of intervention in international affairs, serious dangers of disorder loom in several regions currently experiencing intense conflict, such as the Middle East and Eastern Europe. The international relations team of the Biden administration pursued a flawed theory. While superficially implementing a supposedly non-intervention policy, if regional conflicts or wars actually broke out and expanded, the United States would still intervene in regional conflicts, and specifically in high-risk regional wars. The U.S. could not shake off the responsibility of restoring world order, especially when its own interests were clearly compromised. It could only shed lesser responsibilities, but ultimately intervenes in greater ones, resulting in far higher actual costs. The Biden team failed to fully comprehend this elasticity inherent in international relations and conflicts.
At the time this prediction and the criticisms against the U.S. were made seven years ago, it was still Joe Biden's presidency.
Now, the U.S.-Iran war continues to revolve around the Strait of Hormuz, while the Houthi war is ongoing in the Red Sea and around the Bab el-Mandeb Strait. Despite large-scale U.S. and Israeli airstrikes and bombardment, Iran's Islamic regime remains intact and resilient. Iran's representatives continue to stand on the United Nations stage in New York and condemn the United States. All the U.S. can do is expel the Iranian delegation and maintain its blockade of the Strait of Hormuz. On October 10, the Iran-backed Houthi forces launched missiles at King Khalid International Airport in Riyadh, the Saudi capital, killing at least 21 people, including one U.S. citizen, and injuring another 309. The airport was forced to suspend all operations. This was the heaviest loss of life suffered by the Arab states of the Persian Gulf since the outbreak of the war involving the U.S., Israel, and Iran. The two wars in the Middle East are continuing. As people focus on who will win and who will lose, they overlook a major question: what impact will these two wars, with their mounting threats and pressure, have on the Gulf states' future?
The Gulf states were originally among the countries in the world that had been using energy as a strategic weapon while enjoying steadily growing economic performance and influence. Each had ambitious, large-scale and almost visionary plans for modernization and development, including Saudi Vision 2030, UAE Centenary 2071, Qatar National Vision 2030, Oman Vision 2040 and New Kuwait 2035. These vast development programs all require enormous amounts of capital. Saudi Arabia's modernization program alone involves funding of up to USD 1 trillion. These countries are all trying to break free from their dependence on a single economic model centered on energy and develop into prosperous, modern, civilized states, turning them into regional powers with global influence.
Gulf states refer to the six Gulf countries, namely Saudi Arabia, the UAE, Qatar, Kuwait, Oman, and Bahrain. Their economic revenues derive primarily from the sale of oil and gas resources. Typically, the annual energy export revenues of the six Gulf countries range between USD 400 billion and USD 600 billion. Among them, Saudi Arabia is one of the world's largest oil exporters, usually generating USD 150 billion in annual energy export revenues. This scale of energy export revenue is roughly equivalent to the annual GDP of a mid-level developed country, and is also close to the total revenue scale of the world's large multinational corporate groups.
The question is how much the six Gulf states spend through their national budgets. Under normal circumstances, based on the 2024 fiscal expenditure of the six Gulf Cooperation Council (GCC) countries, i.e., Saudi Arabia, the United Arab Emirates, Qatar, Kuwait, Oman and Bahrain, their governments' combined annual expenditure amounts to approximately USD 670 billion. This shows that their fiscal spending is broadly on the same scale as the energy revenues mentioned above, which range from approximately USD 400 billion to USD 600 billion a year. This may surprise many people. Although the six Gulf states appear extremely wealthy, their actual fiscal spending leaves them barely able to balance their budgets, and they can easily end up spending more than they earn.
The main reason for this situation is that Gulf countries' domestic political and social environments require massive amount of money to maintain stability. Employment for citizens in Gulf nations is concentrated mainly in government sectors, and high-welfare systems must be implemented, resulting in substantial housing subsidies and energy subsidies. In fact, recurrent expenditures account for about 84% of total expenditures across the six Gulf states, utilized in public welfare security sectors such as salaries, subsidies, healthcare, and education. Not only do these fiscal expenditures take up a large proportion of spending, but they also possess a high degree of rigidity. Otherwise, society would struggle to remain stable. Therefore, from the perspective of revenue and expenditure, the massive energy revenues of Gulf nations are better understood as cash flows of energy revenue that come in fast, but are spent faster and in greater amounts. Consequently, the liquidity of energy revenues exerts a tremendous, and arguably dominant, influence on the fiscal revenues of Gulf nations.
ANBOUND's basic assessment is that the current war situation in the Gulf region is moving towards a prolonged conflict, as noted in previous research briefings. This means that a clear risk scenario is emerging: (1) the war with Iran becomes protracted; (2) the Houthi conflict expands; (3) the Strait of Hormuz remains under sustained threat; (4) energy exports decline by 10% to more than 30%; and (5) military spending continues to rise. This scenario points to a troubling future for the Gulf states and the wider Middle East, with substantial knock-on effects for countries around the world. The room for firmly refusing to take sides is shrinking, and an increasing number of countries will be forced into the conflict.
All of this will affect the Gulf nations' energy revenues. According to assessments, during the most severe phase, in the short term, their oil and gas exports could fall by 60% to 90%. However, after adjustments involving alternative routes, inventories, and logistics, there is good reason to believe that long-term losses could be around 10% to 30%. Meanwhile, Saudi Arabia has long ranked among the world's top ten military spenders because of the security pressures posed by Iran, the Houthi regional conflict and the need to protect energy infrastructure. The UAE also has a high level of military expenditure relative to GDP. As the wars involving Iran and the Houthis become protracted, the Gulf states will need to purchase large quantities of additional military equipment, including air defense systems, counter-drone systems, radar, cybersecurity capabilities, equipment to protect energy infrastructure, and military equipment needed for ground warfare against the Houthi forces. As a result, the Gulf states will face considerable financial difficulties. Fiscal revenues will decline even as expenditure rises sharply. One consequence may be that they will be forced to begin liquidating overseas assets.
According to rough estimates, the pool of national capital accumulated by the Gulf states over the past 70 years amounts to approximately USD 4 trillion to USD 5 trillion. Given their fiscal constraints, it is highly possible that these countries will sell or liquidate some of their overseas assets. Several of their well-known financial powerhouses, including the Abu Dhabi Investment Authority, Saudi Arabia's Public Investment Fund and the Kuwait Investment Authority, have focused their investments on shares in prominent Western listed companies, bonds, private equity funds and real estate. Any reduction of these holdings and subsequent liquidation will inevitably have a substantial impact on and send shockwaves through global financial markets.
Other than the fiscal pressures facing the Gulf states and the risk of a global asset revaluation, the biggest and more far-reaching issue is how the situation in the Middle East will change the structure of the global energy market. It is this shift in the global balance of power that will have the most devastating and far-reaching consequences. Previously, although the global energy market could not be described as a purely seller-driven market, the Gulf states still had a significant say and considerable influence. Now, however, the dramatic changes in the Middle East have created the absurd possibility that neither the "seller" nor the "buyer" will have the final say. Instead, a third party, the "logistics corridor operator", may come to determine the outcome. This means that whoever has the capacity to guarantee the security of global energy routes will wield greater influence in the global energy market.
Such changes create opportunities for some countries while exposing others to risks. The international community is essentially powerless to respond to these developments, and multilateral diplomacy is of no use. An era in which international standing is won through real power and strategic intelligence has therefore arrived. This will be a new age for heroes in the style of Catherine the Great.
