U.S. Embassy Struck as Conflict Widens

0:00That's pure automotive joy. I'm Peter, the owner of Muscle Car Junior. It started as a hobby, then I started posting about it. Before I knew it, I built a business restoring muscle cars on Facebook Marketplace and the community of car lovers on Instagram. Today, new customers send me WhatsApp messages from all over. Not bad for a hobby. Learn how Meta helps over 35 million American businesses like Peter's grow at meta.com slash community.

0:32Fighting kicks up another notch across the Middle East, leading the U.S. to pull back diplomats from six countries. We'll look at how Gulf states are responding to waves of Iranian attacks and the challenge facing airlines trying to stay out of harm's way. They're looking at one of the most significant aviation crises when it comes to war-related disruption that we've really ever seen. Plus, how the conflict is threatening to send consumer prices higher. It's Tuesday, March 3rd. I'm Luke Vargas for The Wall Street Journal, and here is the AM edition of What's News, the top headlines and business stories moving your world today.

1:16The U.S. is evacuating a number of its diplomatic sites across the Middle East this morning after its embassy in Saudi Arabia was hit by drones. We report there were no casualties in that attack, But that hasn't stopped the State Department from closing its embassy in Kuwait and ordering that non-emergency personnel and their families leave the United Arab Emirates, Bahrain, Iraq, Jordan, Kuwait, and Qatar. The U.S. embassy in Abu Dhabi has also warned there could be militant attacks in the UAE. Those steps by the U.S. come as Secretary of State Marco Rubio said that American military action against Iran is expected to intensify.

1:53The hardest hits are yet to come from the U.S. military. The next phase will be even more punishing on Iran than it is right now. Someone was screaming, how long will it take? I don't know how long it'll take. We have objectives. We will do this as long as it takes to achieve those objectives, and we will achieve those objectives. Just this morning, Israel launched a fresh barrage of strikes on Tehran, as well as against Hezbollah in Lebanon. Israel's military said that troops are also taking defensive positions in southern Lebanon in response to ongoing rocket fire from Hezbollah. Meanwhile, Gulf states are racing to hold back an onslaught of Iranian drones and missiles, in some cases in full view of thousands of tourists stuck in cities like Doha or Dubai, before those countries' stockpiles of defensive weapons are depleted.

2:36For more on that, I'm joined by Rowan Mea, senior analyst for the Middle East and North Africa at Oxford Analytica, a part of Dow Jones, the publisher of The Wall Street Journal. Rowan, according to our reporting, some Gulf states could burn through their air defenses within days. Just to paint a picture of the pressure that they're under, the UAE said last night that over the prior three days, it had been targeted by 174 Iranian ballistic missiles, as well as nearly 700 drones. Where is this situation leaving these countries?

3:05Rawan Maayeh:Well, Luke, certainly the Gulf states are in an incredibly difficult position. They've sought a detente with Iran since 2023, and they've effectively attempted several times to mediate and de-escalate tensions between the U.S. and Iran, and yet have now found themselves very much on the front line of this war. And they certainly appear to be bearing the overwhelming brunt of the Iranian retaliation. And taking the war to the Gulf states in this precise way is very much a strategic decision on the part of Tehran. We have an Iranian leadership that sees itself in a fight for survival, and it is acting on expressed intent.

3:40Rawan Maayeh:And that expression has been made several times that it would seek to expand the conflict. And by doing so, it wants to significantly raise the cost for the United States and its regional allies. And in fact, the global economy as a whole, we've seen oil and gas prices now starting to rise. It seeks that precise economic impact in order to push the Gulf neighbours to start pressing Washington for an end game. Now, the silver lining, as you've said, is that there have been successful interceptions. The majority of incoming attacks did not hit their targets. Most had failed. But Iran is keen on expanding its list of targets.

4:11Rawan Maayeh:So we've seen civilian infrastructure being hit. We've seen soft targets being attacked. We've had international airports in Kuwait, Bahrain, Dubai and Abu Dhabi being hit, as well as hotels in Bahrain and Dubai. But beyond this material damage, it's really the psychological impact that has been quite profound. The barrage of strikes threatened to hit the soft appeal of the Gulf states. And Ruan, that appeal is not just for tourists and for expatriates, but for businesses, too, wanting to operate in these countries. We heard from Amazon, just citing one company here, reporting overnight that some of its data centers in the UAE and Bahrain have been targeted with drones.

4:46So the economic impact here could continue to grow, I imagine, as well.

4:49Rawan Maayeh:Yes, for Dubai in particular, it's marketed itself as a business and tourism hub. NOHA sees steady streams of meetings and events. The closure of airspace in Qatar, the UAE, Bahrain, Kuwait, has also left thousands of people stranded. There's been cancellations of flights. Cargo operations, which are also important to local supplies chains, have been disrupted. And we also have the issue, obviously, of the Straits of Hormuz and disruption in cargoes by there. And the Amazon issue that you've cited, coupled with the Qatar and the Saudi energy strikes. Yesterday, there were strikes reported on Qatar's gas facilities.

5:22Rawan Maayeh:Saudi Arabia announced a temporary shutdown of the Rastanura oil refinery. And one does wonder whether we're now significantly going up the escalation ladder, whether Tehran is now really looking to attack more oil and gas infrastructure, other critical infrastructure, and that would obviously raise the scale and the severity of the conflict. What would it take for the Gulf states to get more directly involved here? What's their calculus? Saudi Arabia has hinted at taking all necessary measures to protect its security. Qatar has said, you know, these attacks must not go unanswered. So definitely the military question is being put out there.

5:53Rawan Maayeh:But I think that we have to be quite careful in whether we determine that that would be the course of action that's going to be taken. A military move would definitely carry really quite high risk. And I'm not sure what the probability of reward would be. Israel and the United States have far superior capabilities operationally in terms of intelligence. And so any such intervention is not going to be something that's going to dramatically alter the trajectory of the war. But what it might invite is even firmer and stronger Iranian retaliation, more so than what we are seeing now. And that's something that would be quite dangerous.

6:24Rawan Maayeh:And therefore, the economic calculus of that military option is probably weighing quite heavily on the GCC leaders at this point in time. But I think the involvement might be more about expanding the access of the U.S. to their territories for that use to then be made to attack Iran. But I think the emphasis will be on defense more so than offense at this point. I know the detente and the rapprochement is probably dead as we speak, but there needs to be a way to handle and manage Iran in the long term. And that might not be through being actively involved in attacking the country. I've been speaking to Rowan Meya, senior analyst for the Middle East and North Africa at Oxford Analytica.

6:59Rowan, thank you so much for being with us on What's News.

7:02Rawan Maayeh:Thank you. The first flights have begun taking off and landing in Dubai, even as airspace closures remain in place across large swaths of the Middle East. Journal Aviation reporter Ben Katz has the latest. We're looking at a situation where, yes, some flights have restarted into parts of the Middle East, but that's really quite ad hoc. Those are limited operations. The vast majority of flights coming into the region have still been cancelled. Airlines, of course, are cautious about this. They don't want to be occupying skies where there are missiles or drones being targeted. There's also the risk of being misidentified by air defense systems, which we saw with the three US-operated fighter jets that were shot down by friendly fire in Kuwait.

7:44Now, the crux of the issue here is that there actually isn't that much airspace to use at the moment. With Russia, Ukraine, with the growing conflict between Pakistan and Afghanistan, this critical highway for traffic is really condensing. And it adds hours to flights. It adds fuel costs. It disrupts these really careful schedules that the airlines have put together. And it just adds huge amounts of uncertainty, which is the worst thing that an airline could ever really want to deal with. And while it's not uncommon to see airspace closed temporarily when fighting flares up around the world, Ben said that this time the effects are substantially greater.

8:18The big question really is how long this lasts. We've heard from President Trump saying four to five weeks. What that means for aviation is they're looking at one of the most significant aviation crises when it comes to war-related disruption that we've really ever seen. Airlines use the Middle East as this really critical corridor that can connect Europe to Asia, Southern Asia into Africa. There's a lot of exchange of passengers. In addition to that, the Middle East over the last 20, 30 years has become a critical destination. You look at airlines like Emirates, Qatar Airways. These are some of the biggest airlines in the world when it comes to international traffic.

8:53That's really reflected in the numbers. We've seen over 12 ,000 cancellations of flights And we've seen an estimated 1.5 million passengers being disrupted. A number of airline stocks dropped in trading Monday, with Air France KLM, British Airways owner IAG, and Deutsche Lufthansa declining by more than 5%, with all three also falling today. Coming up, we'll look at how the escalating conflict is raising the specter of higher inflation yet again. Plus, Paramount may have won the Warner race. But at what cost? Those stories and more after the break.

9:32Hi, this is Alex Osula, host of the WSJ's What's News podcast. We bring you the biggest news of the day, from business and finance to global and political developments that move markets. If you're looking for more insights and tools to understand the latest headlines, consider becoming a subscriber to The Wall Street Journal. Visit subscribe.wsj.com slash what's news to subscribe now.

10:01Government bonds are selling off amid fears that the Middle East conflict will lead to rising inflation driven by higher oil prices. And as markets reporter Chelsea Delaney explains, that won't just mean a bigger bill at the pump. These energy prices set the cost for transport, for shipping, for airlines, the prices that businesses pay for their energy. It can feed through into the economy in a really big way. We saw this back in 2021 and 2022. At that time, economists thought that these energy price spikes would be temporary, but then it really had this broad-based impact on inflation. And then that ended up driving up wages and things like that.

10:41So it can really spiral into a larger inflation impact. And should inflation, in fact, start to rise, investors worry central banks will respond by rapidly increasing interest rates. Yeah, this comes at a bit of an unfortunate time because central banks, including the Federal Reserve, were just sort of getting over the inflation crisis that followed the pandemic. They're bringing down interest rates that was filtering through to households. Now they're staring down a potentially another energy price crisis and rise in inflation. And that could mean that they have to slow the interest rate reductions that they've been doing.

11:17It also could mean that they have to start raising interest rates again. How long this conflict lasts, how long the disruptions to global energy prices last, that's what's going to really determine how big of an impact this has on inflation and how central banks are going to respond to it. Meanwhile, Paramount may have won the race to buy Warner Brothers Discovery, but the$81 billion bid is also costing the company a credit rating downgrade. Fitch Ratings has slashed Paramount's rating to junk status, warning that the deal's massive financing needs and integration challenges could cause the company to miss its financial targets.

11:53And we are exclusively reporting that IR Labs, the chip startup backed by NVIDIA and AMD, has raised$500 million to develop a new power-efficient AI chip. The advanced technology is known as co-packaged optics and is expected to revolutionize chip efficiency. NVIDIA is betting big on the new processors, announcing a$4 billion investment in two similar optical firms this morning. And that's it for What's News for this Tuesday morning. Today's show was produced by Hattie Moyer and Daniel Bach. Our supervising producer is Sandra Kilhoff. And I'm Luke Vargas for The Wall Street Journal. We will be back tonight with a new show.

12:31Until then, thanks for listening.

12:44The Future of Everything is the Wall Street Journal's flagship live event, returning to New York City May 4th through 5th. Be there as CEOs, policymakers, and innovators sit down with our journalists to answer the most pressing questions of the day. From finance, tech, and economic policy to sports, streaming, and style, we're bringing together today's most compelling newsmakers for two days of conversations on what's ahead. Listeners of this podcast can access exclusive discounted rates by visiting wsj.com slash future. That's wsj.com slash future.