President Trump’s war on Iran is fundamentally reshaping the Gulf region, from near-term shocks to Tehran’s oil-based economy under a crippling U.S. naval blockade to the long-term impact of the United Arab Emirates ditching the OPEC cartel.
Israel and Lebanon are talking to each other for the first time in decades about dealing with Iran-backed Hezbollah terrorists, and Tehran’s surprise drone attacks are forcing Gulf nations to reshuffle their priorities and alliances.
Taken together, the developments show that Mr. Trump’s decision to bomb Iran is overhauling economies and diplomatic relations in real time and will reverberate in the region for months, and possibly years, to come.
Iran’s oil economy faces a major test
As peace talks drag on, much of the focus in the U.S. has been on social media taunts between Mr. Trump and Iranian leaders and the faltering talks in Pakistan, which is serving as a mediator.
Yet Mr. Trump’s decision to block maritime traffic to and from Iranian ports is having a tangible impact on Iran’s ability to move oil and gain revenue.
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“The U.S. blockade is beginning to materially disrupt Iran’s oil flows, with loadings collapsing and storage filling rapidly. While the immediate revenue impact is limited, operational constraints are now forcing production cuts and setting up a delayed but significant financial squeeze,” Kpler, an intelligence platform for global trade, said in a recent blog post.
Iranian exports were a robust 1.85 million barrels per day in March, but loadings dropped by 70% to 567,000 barrels per day following the blockade.
Iran is running out of space to store its undelivered oil. It is reportedly resorting to floating storage vessels and even loading oil onto trains to China to ease flows.
“There are multiple estimates on how long Iran can hold out before it reaches maximum capacity, ranging from a couple of weeks to a month. But once storage capacity is reached, Iran will have no choice but to significantly limit or completely halt production,” said Caleb Jasso, a senior policy adviser at the Institute for Energy Research.
It’s not just oil. The blockade is preventing Iran from exporting petrochemicals, steel and other products, and its currency — the rial — is falling to new lows against the dollar.
“It’s pretty dire,” said Joel Rayburn, a senior fellow at the Hudson Institute’s Center for Peace and Security in the Middle East. “They can’t just hold out indefinitely. They can’t just sort of live on air.”
Treasury Secretary Scott Bessent recently said Iran’s primary oil export terminal, Kharg Island, is nearing its storage capacity. Resulting cuts to oil production, he said, will slash revenue by an additional $170 million per day, while causing permanent damage to Iran’s oil infrastructure.
“Their economy is a disaster,” said Mr. Trump, who wants Tehran to give up its nuclear ambitions. “We’ll see how long they hold out.”
Who will blink?
While Iran suffers from the blockade, Tehran seems to believe the U.S. will cave first.
Mr. Trump faces domestic pressures in a midterm election year, including lousy polling on the war and rising gas prices.
The national average price of a gallon of gas is well above $4 and rising, compared to around $3 per gallon at the start of the conflict.
Mr. Trump says prices will come down swiftly when the conflict ends.
“The gas will go down. As soon as the war’s over, it will drop like a rock,” Mr. Trump said Thursday. “There’s so much of it, it’s all over the place, sitting all over the oceans of the world.”
The president said the U.S. is a top oil producer, so it is benefiting in some respects.
Experts caution that Tehran’s regime is set up to withstand pressure.
While there have been mass protests and discontent with Iran’s rulers, “this is a regime that has sufficient grassroots support to maintain control, and those grassroots supporters aren’t necessarily looking for the economic prosperity that we in the West are looking for from our governments,” said David Daoud, a senior fellow at the Foundation for Defense of Democracies.
Experts said the Iranian regime remains largely intact despite Mr. Trump’s insistence its leaders have been eliminated.
Jeffrey Feltman, a former U.S. ambassador to Lebanon and a visiting fellow at the Brookings Institution, said Iran’s regime is also less restrained than before the conflict.
The former ayatollah did not strike Gulf partners through direct military action, nor did he close the Strait of Hormuz. Yet now, Iran is aware of the great leverage it has in closing the waterway.
“It’s mystifying that these various scenarios don’t seem to have been taken into account – the firing on the Arab Gulf states, the closure of Hormuz and the resiliency of the regime itself,” Mr. Feltman said. “There certainly has been regime change, but not in the way the president is describing it.”
Experts say Iran has been weakened economically, however, and Gulf nations are looking for alternative routes to export their oil beyond the Strait of Hormuz, which would reduce Tehran’s leverage.
“As a result of the blockade and the war as a whole, Iran’s economy has been devastated and will likely take many years to recover,” Mr. Jasso said. “Consequently, its ability to fund its regional proxies, such as Hamas and Hezbollah, as well as its ability to resupply its own military resources, will be tested and will greatly affect its ability to project power in the region.”
War spurs neighbors to rethink positions
The war on Iran is not just a contest among Washington, Jerusalem and Tehran.
Nations throughout the Gulf region have been dragged into the conflict, forcing them to reconsider their position in the world.
Saudi Arabia’s Public Investment Fund said Thursday it would not provide any more money for LIV Golf, citing its “investment priorities and current macro dynamics.”
The war is not directly to blame for the decision, but the Saudis had been reeling from their inability to move oil through the region.
More substantially, the United Arab Emirates made the bombshell decision to leave the Organization of the Petroleum Exporting Countries, a group of major energy-exporting countries that heavily influences oil prices.
The UAE had long been dissatisfied with OPEC’s tendency to cap production to maintain prices. Yet the Iran war served as a catalyst for the UAE to ditch OPEC.
Iran, which is part of OPEC, struck the UAE with drones and missiles and clamped down on the Strait of Hormuz, further limiting its ability to ship the oil products that serve as the backbone of its economy.
Mr. Trump praised the Emiratis’ move, saying it would prevent OPEC from artificially raising prices.
“I think ultimately it’s a good thing for getting the price of gas down, getting oil down, getting everything down,” he said Wednesday during a meeting in the Oval Office.
Yet the war may further inflame tensions among Gulf nations.
While the UAE has maintained close relations with Israel, the Saudis believe Israel is acting recklessly during the conflict, according to Mr. Feltman.
“What’s happened is because of this war, the Saudis will be more skeptical of any kind of relationship with the Israelis, and more annoyed with their Emirati neighbors because of the OPEC departure,” he said.
“The diplomatic gain in the Middle East,” he said, “becomes much more complicated as these tensions between ostensible friends of the United States get worse.”
Hezbollah is down – but not out
Israel linked arms with the U.S. in bombarding Iran at the end of February.
But it also launched a full-scale attack on Iran-backed Hezbollah terrorists in Lebanon, resulting in the deaths of more than 2,000 militants and civilians.
Early outward friction between the neighboring countries turned into an unusual opportunity for diplomacy.
The White House facilitated the first face-to-face talks between Israeli and Lebanese leaders in more than four decades, resulting in a ceasefire.
Hezbollah is a Shiite militant group that acts both as a political party and an Iran-backed proxy in Lebanon.
Neither the Israelis nor the Lebanese want Hezbollah to drag their countries into war, or allow Iran to have outsized influence over Lebanon’s affairs.
Yet Hezbollah is hanging on, and trying to shape the narrative within Lebanon.
“The Israelis’ ideal would be to swap out Iranian hegemony for Israeli hegemony, and that’s not going to go over well in Lebanon,” Mr. Feltman said. “The Shia were angry at Hezbollah for dragging them back into war, but that anger is now shifted to what the Israelis are doing.”
Also, analysts say, Hezbollah remains able to wage asymmetric warfare and deploy drones to great effect.
“It hasn’t been weakened past the point of regeneration,” Mr. Daoud said.
He said an ongoing ceasefire with Israel is giving Hezbollah some breathing room, and there seems to be a hope in Washington that the Lebanese government will step in and continue squeezing the militant group.
However, “it’s very unlikely that it will happen,” Mr. Daoud said. “There are no signs right now that Lebanon has so fundamentally changed, or its willingness to confront Hezbollah has so fundamentally changed, that we can expect this anytime soon. That’s all the room Hezbollah looks for to regenerate.”
Importantly, the powerful Islamic Revolutionary Guard Corps in Iran will prioritize the durability of Hezbollah, making it harder for Israel to stamp out the terror proxy.
“How will they export the Islamic revolution if they don’t have Hezbollah?” Mr. Rayburn said of Tehran. “They don’t have another means. The Iraqi militias aren’t able to do that, the Houthis aren’t able to do that. It’s Hezbollah. They need Hezbollah.”
