Escalating tensions in the Strait of Hormuz are sending shockwaves through Gulf economies, driving up energy prices, disrupting shipping and straining supply chains.
The current crisis along the Strait of Hormuz came as part of Iran's response to U.S.-Israeli military strikes.
On Feb 28, Israel and the United States launched joint attacks on Tehran and several other Iranian cities, killing Iran's then Supreme Leader Ali Khamenei, along with senior military commanders and civilians.
Iran responded with waves of missile and drone strikes targeting Israel and U.S. assets in the Middle East as well as navigation restriction through the Strait of Hormuz.
As the war drags on, Iran has been leveraging its grip on the waterway, reducing shipping traffic to historical lows as concerns about the wider global economic impact continue to mount.
The narrow waterway carries nearly one‑fifth of the world's oil supply, and analysts warn the worst may be yet to come.
In the United Arab Emirates, already affected by spillover from the conflict, gasoline prices were raised by about 30 percent from the beginning of April, while diesel prices surged approximately 72 percent.
"Anyway, the UAE, for example, produces oil, so it shouldn't be affected as much as countries that are importing oil. But then there is also this global deal that even local prices should be reflecting somehow the global market. Asian countries and European countries are being more affected than the U.S.," said Farah Mourad, senior market analyst of IG Group in Dubai.
Disruptions to shipping are also rippling through global agriculture, with fertilizer costs soaring and transport blocked. Nearly half of the world's urea and large volumes of other fertilizers are exported from Gulf countries through the Strait of Hormuz. Prolonged instability could severely impact spring plowing in the Northern Hemisphere, driving up global agricultural costs and food prices.
The Strait of Hormuz transit has remained "at a near halt" over the past month, with maritime traffic falling by about 95 percent since the U.S.-Israel-Iran conflict, according to the UN Trade and Development (UNCTAD). The agency warned the standstill is disrupting energy shipments, slowing global trade growth, and could fuel inflation through higher energy prices and living costs.
"There are different layers of impact, and the clearest one is energy prices going up. So anything that needs energy, for (example), agriculture will be going up. But then again, we have fertilizer prices, anything being affected by a closure of the supply chain, pressure on supply chains is already being clear at the moment. Higher prices when it comes to insurance for transportation, from the moment you produce until the moment the buyer gets it. So these are energy prices along the way. But we still believe it might be the beginning of this pivot towards these commodities," said Mourad.
A recent report by the United Nations Development Programme warned that escalation of the conflict in the Middle East could cost Arab countries between 120 billion and 194 billion U.S. dollars. It projected 3.6 million job losses, an increase in regional unemployment of up to 4 percentage points, and more than 4 million people pushed into poverty.
Goldman Sachs earlier estimated that if the conflict continues through the end of April, the GDP of Saudi Arabia and the UAE could contract by 3 to 5 percent this year.
"Obviously, there are negatives, we saw in luxury, we saw airlines, we saw services. These will most probably suffer or continue to suffer some pressure. One of the most affected sectors is aviation. We're seeing lower flights, especially linked to this region because this region is a hub, it's a transit route. But then also because of higher oil prices and energy prices," said Mourad.
Analysts say the crisis has exposed the Gulf’s heavy reliance on the Strait of Hormuz as its only maritime outlet. In the longer term, they warn the conflict could push Gulf states to speed up construction of overland oil pipelines, railways and road networks to reduce dependence on the strategic waterway.
Strait of Hormuz tensions weigh heavily on Gulf economies: analyst
Strait of Hormuz tensions weigh heavily on Gulf economies: analyst
