The military exchange between Israel and Iran could have profound implications for the Saudi economy, National Bank of Kuwait’s Issa Hijazeen told EnterpriseAM. The possibility of supply disruptions, retaliatory missile strikes, and even the closure of the Strait of Hormuz has become a credible threat, with both sides vowing continued escalation.

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The strikes have already driven oil prices higher, due to expectations of risk to global energy supply chains, Hijazeen notes. Higher oil prices would increase fiscal revenues and strengthen the Kingdom’s external position, allowing the government to narrow its budget deficit in the short term. However, a prolonged conflict that disrupts air travel or threatens strategic infrastructure could undermine non-oil growth in many sectors including tourism, logistics, and finance, Hijazeen added.

BY THE NUMBERS- Brent crude jumped 7.0% on Friday to USD 74.23 a barrel, marking the largest intraday moves since 2022, Reuters reports. But despite the sudden rise, prices remain in the red y-o-y and well below their 2022 peaks reached a few years back after Russia launched its war on Ukraine.

But oil prices could rise further, with Israel now targeting Iranian energy sites: Israel expanded its focus to include Iran’s energy infrastructure yesterday, with a strike on an Iranian natural gas processing facility in the South Pars gas field — the world’s largest. Although the field’s output is primarily for the domestic market, Israel’s turn towards energy targets could add even more volatility to the international energy market.

While Israel’s attacks have not yet disrupted oil supplies, an Iranian retaliation, like closing the Strait of Hormuz — a channel for some 20% of the world’s oil supply — or attacking regional oil infrastructure could cause prices to rise by a further USD 20 per barrel, former Opec official and Rystad’s head of geopolitical analysis Jorge Leon told the newswire.

THREE SCENARIOS-

“The degree to which the conflict escalates will determine whether the region emerges more fiscally empowered, or whether gains in diversification, trade, and investment will be overshadowed by regional instability and investor caution,” Hijazeen said.

#1- In the optimistic scenario, the conflict between Israel and Iran remains geographically contained, with Iran avoiding attacks on GCC oil infrastructure or US bases, and the Strait of Hormuz stays open under increased monitoring. Brent crude prices would stabilize in the USD 80–85 per barrel range due to supply risk premiums rather than actual production cuts, and Saudi Arabia’s oil production schedules would remain unchanged for this year.

Higher hydrocarbon prices would help narrow the projected budget deficit to about 4% of GDP, and the increase in oil revenues is expected to maintain calm in capital markets. However, growth in Saudi Arabia’s non-oil sector could slightly decelerate to around 3.5% in 2025, though it would remain strong, supported by ongoing reforms and significant FDI inflows.

#2- The baseline scenario will see a prolonged war with partial supply disruptions, characterized by continued Israeli targeting of Iranian military sites and limited Iranian responses against US assets or GCC infrastructure. The Strait of Hormuz will remain open, though maritime insurance costs will go up.

Oil prices are expected to rise to USD 95–100 per barrel, with increased insurance premiums and potential small-scale physical disruptions due to the loss of some Iranian crude, partially offset by spare capacity in Saudi Arabia and the UAE.

Rising defense and strategic reserve spending will pressure the Saudi budget towards a higher deficit, despite the increase in oil revenues. The non-oil sector — including tourism, aviation, and regional non-trade, will experience tangible slowdowns, and FDI decisions may be delayed, negatively impacting non-oil growth across the GCC, while the financial sector will likely increase provisions to counter the potential increase in non-performing loans.

#3- Finally, a pessimistic scenario of a full-scale conflict could involve Iran attempting to block the Strait of Hormuz or targeting Saudi and UAE oil infrastructure, regional airspace would face intermittent shutdowns. This would cause Brent oil prices to surge to USD 100-120 per barrel due to expected supply losses and heightened risks to shipping routes.

While record oil revenues would be generated, they would be offset by increased emergency spending, reconstruction efforts, and subsidy increases, potentially leading to record fiscal deficits in both Saudi Arabia and the UAE, Hijazeen argued. Non-oil sectors like tourism, aviation, logistics, and real estate would contract, capital flight would increase due to heightened risk aversion, and long-term investor confidence would decline, severely disrupting trade due to the blockage of the Strait of Hormuz or attacks on shipping.

Across all scenarios, the monetary policy of Saudi Arabia and the UAE will remain tied to the US Federal Reserve’s decisions, Hijazeen concludes. Central banks will have limited independent flexibility and will likely mirror any policy changes made by the Fed, as both currencies are pegged to the USD.

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