Gulf states caught in the middle of US-Iran conflict

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0:17Good morning from the Financial Times. Today is Tuesday, March 3rd, and this is your FT &E's Briefing. The crisis in the Middle East has got investors looking for safety, and Gulf states are struggling under Iranian strikes. Plus, can the American economy withstand spiking oil prices? I'm Mark Filippino, and here's the news you need to start your day.

0:46Investors poured into gold and the U.S. dollar yesterday. They were looking for safe haven assets as strikes continued in the Middle East. Gold nearly hit a record high on Monday, jumping as much as 2.5%. Investors avoided government bonds, though, which are also normally perceived as safe. Traders braced for a rise in inflation. More on that in just a sec. Meanwhile, hedge funds are backing out of emerging markets. MSCI's broad EM equities index slid almost 2 % on Monday. Markets, including Turkey and India, came under pressure.

1:27The U.S. and Israel's assault on Iran has led to ships being attacked in the Strait of Wormuz. That's the waterway that leads in and out of the Arabian Gulf. Oil is no longer flowing through the strait, which has caused the price to skyrocket. That could be bad news for U.S. President Donald Trump and his fight on the American affordability crisis. Here to discuss is the FT's U.S. economics editor, Claire Jones. Hi, Claire. Hi, Mark. So, Claire, how much does the U.S. rely on oil from outside of the country? So the U.S. is now largely self-sufficient in terms of energy production. The latest figures, which were for 2024, showed that just 17 % of the energy used by Americans was imported, which was the lowest share in 40 years.

2:13Still, everyone is keeping an eye on oil prices, potentially crossing$100 a barrel. And if that happens, Claire, what would that mean for the U.S.? So even though the U.S. imports relatively little energy, a substantial rise in oil prices to$100 per barrel, if it was sustained, would undoubtedly have a hit on the U.S. economy. And the main channel through which that hit would take place is on the impact on inflation. How would President Trump navigate the already really serious affordability crisis in America if inflation does rise? We know that when people think about inflation, one of the big things that they look at, which is a very visible form of inflation, are prices at the gas pump.

3:12At the moment, they're kind of hovering around$3. That's seen as quite a psychologically crucial threshold. They'll likely rise further than that in the coming days. And that will add to the general sense that we've seen at the moment that there is a cost of living crisis here in the US. But any rise, I would expect that to really hit Trump's popularity, especially if it's sustained. and it would see his popularity getting hit just as we're about to enter the campaigning season for November's midterm elections. Now, of course, inflation is one of the main things that the Federal Reserve tackles as part of its remit.

3:58If inflation does rise on the back of oil prices going up, what might the Fed do? The Fed at the moment is really in wait and see mode. it's meeting in the coming weeks and it will almost certainly keep borrowing costs at their current level. If we see an oil price shock that's going to make the Fed in the short term a lot less likely to cut US borrowing costs. Longer term if prices remain pretty high and that starts to weigh on growth if it starts to weigh on the stock market then the Fed could be forced to reverse course and begin cutting rates. But it's exactly the sort of shock that central bankers really don't like.

4:41It's stagflation. It means higher prices and lower growths and really puts them in a very tricky spot if it's sustained. Generally speaking, do you think Americans could absorb the hit of oil priced at$100 a barrel for a prolonged period of time? I think it would have a hit. And in terms of gasoline prices, at least, I think it really depends on what America you're talking about. If you're talking about the big oil producing regions, they won't see as much of an impact in terms of gasoline prices as you will in somewhere like California. In California, gas prices are already a lot more expensive than in a lot of other parts of the US.

5:24and you'd see them become a lot more expensive still should you see a sustained rise in oil prices to$100 a barrel. Claire Jones is the FT's U.S. economics editor. Thanks so much, Claire. Thanks, Mark.

5:44Many Gulf states call the U.S. their ally. They even host American military bases. And since Saturday, they've been the target of Iran's retaliatory strikes. Here to explain what this means for the region is the FT Saudi Arabia correspondent Ahmed Al-Omran. Hi, Ahmed. Hi. How are the Gulf states feeling about being targeted and brought into this? It's a very difficult position for them to be in. Most of these Gulf states have opposed an American strike on Iran and have urged both sides, the Americans and the Iranians, to engage in diplomacy. Oman in particular has been playing this mediation role between the two sides trying to avoid a military conflict.

6:28But here we are, you know, since Saturday, it's been very intense, very jarring for this region to have the conflict playing out in the way that it has done so far. And at the time we're speaking, the Gulf region has not retaliated against Iran's strikes. What could push them over the edge? It depends on the escalation and what Iran is doing. So far, Iran has retaliated to the American strikes by targeting these Gulf countries, including civilian targets in their cities, hotels, landmarks. And more recently, we've seen them target energy infrastructure, oil refinery in Saudi Arabia, the main gas LNG production site in Qatar.

7:17So these countries have become very frustrated, and they expressed this frustration and anger with Iran over the last two days in statements, warning that they condemn these strikes and being targeted, and they warn that they are considering all options when it comes to how to respond. But so far, they have not retaliated directly. Ahmed, what do we know about the hundreds of thousands of travelers who are currently stuck in the Gulf? It caused a sense of panic and concern among a lot of travelers, investors who also do business in this region. We've seen many of them scramble to try to find a way out.

7:59Riyadh and Oman have emerged as the two main routes for which people have been using, mainly by driving in cars overland and then taking flights from there, since these are the two countries that have not closed their airspaces. All the other four Gulf countries, Qatar, Bahrain, Kuwait, and the UAE, have closed their airspaces either fully or partially over the last few days. And that has been a cause of major disruptions for travelers and for flights everywhere. Because, you know, these places, especially Dubai and Doha, are major travel hubs connecting east to west. So the fact that these airports have been closed and their space is closed has been a huge problem for many people as they either try to escape the region or just travel around the world since this is a major hub for people moving around.

8:55Now, in addition to travel destinations, a lot of these places are financial capitals and they're increasingly opening their doors to Western money. What do these tensions mean for that aspect of their identity? I mean, cities like Dubai, Riyadh and Abu Dhabi have been competing intensely over the last few years to attract foreign capital, to become major hubs for doing business and for tourism as well. And they have also always presented themselves as safe havens and stable cities in a region that has experienced a lot of conflict and wars around them. And, you know, this war now has shaken that image badly.

9:37And these countries and these cities would hope that this conflict would come to an end as soon as possible so they can go back to present themselves as, you know, the safe place to do business and be a hub for tourism and investment as well. That's the FT's Ahmed Al-Omran. Thanks, Ahmed. Thanks for having me.

10:04Before we go, the UK will get a health check on its economy today. Chancellor Rachel Reeves is set to deliver her spring statement. Now, we're not expecting a ton from it, and the FT's economics editor Sam Fleming explains that for Reeves and her Labour Party, right now, no news is good news. When Rachel Reeves came to power back in 2024, she set the goal of having only one big fiscal event a year. And this was an attempt to create some more stability in the public finances. And that didn't come off initially because after her first budget in October 2024, she then was forced into a fiscal correction only a few months later.

10:42And then the lead up to the budget of last November was extremely tumultuous, lots of speculation, lots of leaks. And she now wants to kind of create a sort of a more placid fiscal playing field in the hope that this will create better conditions for economic growth. You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News briefing. Check back tomorrow for the latest business news.

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