Economy
In energy-rich Gulf, war threatens not only oil but also water
As missiles and drones limit energy production across the Persian Gulf amid the ongoing U.S.-Israel-Iran war, analysts warn that water, not oil, could be the resource most at risk in the energy-rich but arid region.
Hundreds of desalination plants sit along the Persian Gulf coast, putting individual systems that supply water to millions within range of Iranian missile or drone strikes. Without them, major cities would not be able to sustain their current populations.
In Kuwait, about 90% of drinking water comes from desalination, along with roughly 86% in Oman and about 70% in Saudi Arabia.
The technology removes salt from seawater, most commonly by pushing it through ultra-fine membranes in a process known as reverse osmosis, to produce the freshwater that sustains cities, hotels, industry and some agriculture across one of the world’s driest regions.
For people living outside the Middle East, the main concern of the Iran war has been the impact on energy prices. The Gulf produces about a third of the world’s crude exports and energy revenues underpin national economies.
Fighting has already halted tanker traffic through key shipping routes and disrupted port activity, forcing some producers to curb exports as storage tanks fill.
But the infrastructure that keeps Gulf cities supplied with drinking water may be equally vulnerable.
“Everyone thinks of Saudi Arabia and their neighbors as petrostates. But I call them saltwater kingdoms. They’re manmade fossil-fueled water superpowers,” said Michael Christopher Low, director of the Middle East Center at the University of Utah. “It’s both a monumental achievement of the 20th century and a certain kind of vulnerability.”
The war that began Feb. 28 with U.S. and Israeli attacks on Iran has already brought fighting close to key desalination infrastructure. On March 2, Iranian strikes on Dubai’s Jebel Ali port landed some 12 miles from one of the world’s largest desalination plants, which produces much of the city’s drinking water.
Damage also was reported at the Fujairah F1 power and water complex in the United Arab Emirates (UAE), and at Kuwait’s Doha West desalination plant. The damage at the two facilities appeared to have resulted from nearby port attacks or debris from intercepted drones, and so far there is little evidence of Iran intentionally targeting water treatment sites, experts said.
Many Gulf desalination plants are physically integrated with power stations as co‑generation facilities, meaning attacks on electrical infrastructure could also hinder water production.
Even where plants are connected to national grids with backup supply routes, disruptions can cascade across interconnected systems, said David Michel, senior fellow for water security at the Center for Strategic and International Studies.
“It’s an asymmetrical tactic,” he said.
“Iran doesn’t have the same capacity to strike back at the United States and Israel. But it does have this possibility to impose costs on the Gulf countries to push them to intervene or call for a cessation of hostilities.”
Desalination plants’ importance, vulnerability
Desalination plants have multiple stages – intake systems, treatment facilities, energy supplies – and damage to any part of that chain can interrupt production, according to Ed Cullinane, Middle East editor at Global Water Intelligence, a publisher serving the water industry.
“None of these assets are any more protected than any of the municipal areas that are currently being hit by ballistic missiles or drones,” Cullinane said.
Gulf governments and U.S. officials have long recognized the risks these systems pose for regional stability: if major desalination plants were knocked offline, some cities could lose most of their drinking water within days. A 2010 CIA analysis warned attacks on desalination facilities could trigger national crises in several Gulf states, and prolonged outages could last months if critical equipment were destroyed.
More than 90% of the Gulf’s desalinated water comes from just 56 plants, the report stated, and “each of these critical plants is extremely vulnerable to sabotage or military action.”
A leaked 2008 U.S. diplomatic cable warned the Saudi capital of Riyadh “would have to evacuate within a week” if either the Jubail desalination plant on the Gulf coast or its pipelines or associated power infrastructure were seriously damaged.
Saudi Arabia has since invested in pipeline networks, storage reservoirs and other redundancies designed to cushion short-term disruptions, as has the UAE. But smaller states such as Bahrain, Qatar and Kuwait have fewer backup supplies.
As warming oceans increase the likelihood and intensity of cyclones in the Arabian Sea and raise the chances of landfall on the Arabian Peninsula, storm surge and extreme rainfall could overwhelm drainage systems and damage coastal desalination.
The plants themselves contribute to the problem. Desalination is energy-intensive, with plants worldwide producing between 500 and 850 million tons of carbon emissions annually, approaching the roughly 880 million tons emitted by the entire global aviation industry.
The by-product of desalination, highly concentrated brine, is typically discharged back into the ocean, where it can harm seafloor habitats and coral reefs, while intake systems can trap and kill fish larvae, plankton and other organisms at the base of the marine food web.
As climate change intensifies droughts, disrupts rainfall patterns and fuels wildfires, desalination is expected to expand in many parts of the world.
Destruction in past conflicts
During Iraq’s 1990-1991 invasion of Kuwait and the subsequent Gulf War, Iraqi forces sabotaged power stations and desalination facilities as they retreated, said the University of Utah’s Low. At the same time, millions of barrels of crude oil were deliberately released into the Persian Gulf, creating one of the largest oil spills in history.
The massive slick threatened to contaminate seawater intake pipes used by desalination plants across the region. Workers rushed to deploy protective booms around the intake valves of major facilities.
The destruction left Kuwait largely without fresh water and dependent on emergency water imports. Full recovery took years.
More recently, Yemen’s Houthi rebels have targeted Saudi desalination facilities amid regional tensions.
The incidents underscore a broader erosion of long-standing norms against attacking civilian infrastructure, Michel said, noting conflicts in Ukraine, Gaza and Iraq.
International humanitarian law, including provisions of the Geneva Conventions, prohibit targeting civilian infrastructure indispensable to the survival of the population, including drinking water facilities.
The potential for harmful cyberattacks on water infrastructure is a growing concern. In 2023 and 2024, U.S. officials blamed Iran-aligned groups for hacking into several American water utilities.
After a fifth year of extreme drought, water levels in Tehran’s five reservoirs plunged to some 10% of their capacity, prompting President Masoud Pezeshkian to warn the capital may have to be evacuated.
Unlike many Gulf states that rely heavily on desalination, Iran still gets most of its water from rivers, reservoirs and depleted underground aquifers. The country operates a relatively small number of desalination plants, supplying only a fraction of national demand.
Iran is racing to expand desalination along its southern coast and pump some of the water inland, but infrastructure constraints, energy costs and international sanctions have sharply limited scalability.
“They were already thinking of evacuating the capital last summer,” Cullinane of Global Water Intelligence said. “I don’t dare to wonder what it’s going to be like this summer under sustained fire, with an ongoing economic catastrophe and a serious water crisis.”
U.S. President Donald Trump on Friday ordered a new round of sanctions on Cuba, targeting a wide range of individuals and warning foreign banks against conducting business with them.
The measures are the latest thrust of a Trump administration drive to put heavy pressure on Cuba, which is in the throes of a major economic crisis after the United States cut off the flow of oil from Venezuela.
In an executive order, Trump said he would impose sanctions on people involved in sweeping sections of the Cuban economy, which is steered by the government.
Trump will target people known to “operate in or have operated in the energy, defense and related materiel, metals and mining, financial services, or security sector of the Cuban economy, or any other sector of the Cuban economy,” as determined by the U.S. government, the order said.
It also said it would target Cuban officials judged to have engaged in “serious human rights abuses” or corruption.
The people listed will be unable to visit the United States, it said.
The United States will impose sanctions on any foreign financial institutions that deal with the people targeted in the new order, it said.
The sanctions come despite moves toward dialogue from the two countries, with senior U.S. officials visiting the island for talks in April.
Secretary of State Marco Rubio, a Cuban-American and vociferous critic of Havana, has repeatedly called for major change in Cuba.
Trump has mused about taking over the island nation, which lies 145 kilometers (90 miles) from Florida and has been under a nearly continuous U.S. trade embargo since Fidel Castro led a communist revolution in 1959.
New tax incentives as part of a comprehensive legislative package will strengthen Türkiye’s position in high-value-added global service sectors, Treasury and Finance Minister Mehmet Şimşek said on Friday.
Şimşek said the government would continue supporting foreign currency-earning activities in line with its goal of making Türkiye a major hub for services exports.
“We will further strengthen our global position in high-value-added services exports by increasing the tax deduction to 100%, provided that the full earnings from many service activities are brought back to Türkiye,” he said in a post on social media platform NSosyal.
Ankara has increasingly prioritized services exports, viewing the sector as one of the key sources of foreign currency inflows and a buffer against Türkiye’s chronic goods trade deficit.
Şimşek highlighted the strength of Türkiye’s services trade surplus, saying it had reached nearly $63 billion.
Türkiye’s annualized services exports reached $122.2 billion as of February this year. Imports stood at $59.7 billion.
Total exports of goods and services reached a historic $396 billion in 2025, according to official data.
The government’s medium-term economic program foresees overall exports reaching $282 billion this year. Together with services exports, that figure is estimated to total $410 billion.
The new measure is designed to encourage exporters to fully repatriate foreign currency revenues while boosting Türkiye’s appeal in sectors such as software, gaming, health tourism and other knowledge-intensive services.
The incentive is part of a broad package aimed at boosting Türkiye’s competitiveness and attracting investment.
The package also foresees Türkiye reducing the manufacturing exporters’ corporate tax rate to 9%. The incentives also include zero corporate income tax on transit trade.
Major central banks left interest rates unchanged this week but warned that they could raise them soon to prevent a jump in energy prices, caused by the U.S.-Israeli war with Iran, spilling over into a surge in broader inflation.
The U.S. Federal Reserve (Fed) kept rates steady, but three policymakers felt the reference to an “easing bias” in the policy statement was no longer appropriate, while central banks in Europe and Japan hinted that they will hike rates at upcoming meetings.
Here’s where the 10 developed market central banks stand, ranked from the highest policy rate to the lowest:
Australia
The Reserve Bank of Australia (RBA) has raised rates twice this year, now to 4.1% – the highest rate in the G-10. Markets see around an 80% chance it’ll hike again next week, and expect at least two increases by year-end.
Inflation is running hot. Wednesday data showed headline inflation at 4.1% in the first quarter compared to a year earlier, well above the RBA’s 2-3% target range, though the core measure, at 3.5%, offered a modicum of relief.
Norway
Norges Bank also meets next week, having said it may raise rates once or twice this year to rein in renewed inflation pressures from strong wage growth and higher energy costs.
It kept rates on hold in March at 4%.
Core inflation, at around 3% in March, has exceeded its target of 2% each month since early 2022.
Britain
The Bank of England (BoE) left its key rate steady at 3.75% on Thursday, with one vote for a rate hike.
The BoE also scrapped its usual practice of publishing a central forecast for inflation and other key economic indicators, instead producing three scenarios, the most extreme of which could require a “forceful” increase in borrowing costs.
United States
The Fed left rates unchanged on Wednesday in an 8-4 vote, the narrowest split in decades. Three officials opposed a tilt toward easing, and one voted for a rate cut.
The Fed kept the “easing bias” in its policy statement, but outgoing Chair Jerome Powell said that a change could conceivably be made as soon as June.
Traders expect the Fed to skip rate cuts in 2026 and possibly raise rates in the first half of 2027.
Nez Zealand
The Reserve Bank of New Zealand held rates at 2.25% earlier in April. Its governor said this week that measures of core inflation were stable within its 1%-3% target band in the first quarter, though it was ready to act if needed.
Markets are pricing three hikes by the end of the year.
Canada
The Bank of Canada (BoC) held rates steady at 2.25% on Wednesday, saying higher oil prices would benefit Canada by boosting export revenues, while modestly squeezing businesses and consumers.
The BoC assumed oil prices would fall to $75 a barrel by mid‑2027, and if so, its policy rate was about right. But it said it would respond swiftly if inflation proved persistent.
Inflation rose to 2.4% in March, within the BoC’s target range.
Eurozone
The ECB is also biding its time for now. It too left rates unchanged at 2% on Thursday but signaled its rising concerns over soaring inflation, bolstering bets it would lift rates several times this year, with an initial move likely as soon as June.
President Christine Lagarde said the final decision to hold rates was unanimous, but told a press conference a possible rate hike had been discussed “at length” by policymakers.
Sweden
The Riksbank meets next week, with most economists expecting no change to the 1.75% key rate.
Swedish policymakers have also warned of the risks of higher inflation due to the war, and say they could take action if needed.
Japan
The Bank of Japan (BOJ) kept rates steady at 0.75% on Tuesday but gave unusually blunt signals of a near-term rate hike, warning extra vigilance was needed to keep inflation in check.
Three dissenters proposed a hike.
Since 2022, the BOJ has cautiously raised rates from negative territory. They remain lower than elsewhere, contributing to yen weakness, which in turn could further drive inflation.
Complicating the picture for the BOJ, Japanese government bond yields are at their highest in decades.
Switzerland
At 0%, the Swiss National Bank (SNB) has the lowest rates in the G-10.
The SNB is expected to leave rates steady at its June meeting and to rely on foreign exchange intervention to counter a sharp appreciation of the Swiss franc, which has been supported by investors seeking safe-haven assets.
A stronger currency lowers import prices, cushioning the inflationary impact of higher energy costs, but risks pushing inflation below the SNB’s 0%-2% target range.
Consumer prices rose by 0.3% last month, compared with March 2025, the highest in 12 months.
Both the Bank of England (BoE) and the European Central Bank (ECB) kept their benchmark interest rates steady on Thursday, joining peers including the Federal Reserve (Fed) and the Bank of Japan (BOJ) as policymakers continue to weigh risks from the ongoing conflict and blockade in Iran.
The Monetary Policy Committee (MPC) in Britain voted 8-1 to keep the BoE’s benchmark rate at 3.75% as only Chief Economist Huw Pill sought a hike to 4.0%, in line with expectations in a Reuters poll of economists.
A day after the Fed kept rates on hold and shortly before the European Central Bank left rates unchanged too, the MPC said it would continue to closely monitor the situation in the Middle East.
Sterling weakened slightly against the U.S. dollar and the euro. Two-year British government bond yields, which are sensitive to speculation about BoE rates, fell by around 5 basis points, and investors dialled back on their bets on three BoE rate hikes this year.
BoE Governor Andrew Bailey said the central bank would face a “difficult judgment call” on whether to raise rates, as waiting for conclusive evidence would leave things too late.
ECB on hold as inflation picks up to 3%
Holding rates at 2%, the ECB did not surprise as it also held interest rates steady and warned of growing risks to the growth and inflation outlook due to the war in the Middle East.
Energy costs have spiked since the near-total closure of the Strait of Hormuz, through which about a fifth of the world’s oil and gas usually passes, following the outbreak of the U.S.-Israeli war against Iran.
Eurozone inflation is already picking up – it jumped to 3% in April, above the ECB’s 2%, but concerns about inflation have to be balanced against the risk of curbing lackluster growth by making borrowing more expensive.
“The upside risks to inflation and the downside risks to growth have intensified,” the ECB said in a statement announcing its decision.
“The longer the war continues and the longer energy prices remain high, the stronger is the likely impact on broader inflation and the economy,” it said.
Ahead of the meeting, analysts had expected the ECB to keep its key deposit rate at two percent, where it has been since June last year, as the bank waits to see how the war plays out.
Italian bank UniCredit wrote in a note that it did not “see the urgency” for the Frankfurt-based institution to act, particularly as inflation was around the ECB’s target before the conflict.
“The weakening of the outlook for demand, particularly for private consumption, reinforces the case for the ECB to be patient,” it said.
Eurozone economic growth slowed to 0.1% in the first three months of the year, official data showed Thursday, while figures since the outbreak of the war have pointed to falling consumer and investor confidence and weakening business activity
The U.S. economy regained some momentum at the start of 2026, expanding at a modest 2% pace from January through March after recovering from last fall’s 43-day federal government shutdown. But the outlook appears to be clouded by the Iran war.
The Commerce Department reported Thursday that gross domestic product (GDP), the nation’s output of goods and services, rebounded from a lackluster 0.5% expansion the last three months of 2025.
The federal government’s spending and investment grew at a 9.3% annual rate in the first quarter, adding more than half a percentage point to growth after lopping off 1.16 percentage points in fourth-quarter 2025.
Growth in consumer spending, which accounts for 70% of U.S. economic activity, slowed to 1.6% in the first quarter from 1.9% at the end of 2025. Spending on goods, including food and clothing, fell slightly. Spending on services slowed.
But business investment, likely driven by spending in artificial intelligence, rose at an 8.7% pace.
A weak housing market continues to weigh on the economy. Residential investment fell at an 8% annual pace – the fifth straight quarterly drop and the biggest since the end of 2022.
Excluding housing, nonresidential investment surged 10.4%, the biggest jump in nearly three years.
An uptick in imports, which rose at an annual rate of 21.4% from January-March, slashed more than 2.6 percentage points off first-quarter growth.
“This is a split-screen economy,” Heather Long, chief economist at the Navy Federal Credit Union, wrote.
“Companies and investors involved in AI are on fire. Meanwhile, middle and moderate-income households are struggling with high gas prices … Consumption is slowing as people are struggling to manage all their bills and growing more concerned about the future.”
Still, a category within the GDP data that measures the economy’s underlying strength grew at a solid 2.5% clip, accelerating from 1.8% in the fourth quarter of 2025. This category includes consumer spending and private investment, but excludes volatile items like exports, inventories and government spending.
The first quarter included about a month of the clash in Iran. Iran has blocked the Strait of Hormuz through which a fifth of the world’s oil and liquefied natural gas passes. That has driven energy prices higher, fueling inflation and hurting consumers. The Federal Reserve, announcing Wednesday that it was keeping its benchmark interest unchanged, cited “a high level of uncertainty″ arising from the conflict.
Carl Weinberg, chief economist at High Frequency Economics, did not even bother to forecast first-quarter GDP growth.
“The truth is that we do not have any defensible basis for trying to project how these indicators will print,” Weinberg wrote in a commentary Monday.
“President Donald Trump’s war with Iran has led to a total blockade of the Strait of Hormuz. We do not know how to model the impact of that event, as we have never seen anything quite like it.″
Thursday’s report was the first of three Commerce Department estimates.
In last week’s policy meeting, the Turkish central bank suggested that inflation in April is being driven mainly by rising energy and food prices, while the underlying trend is expected to increase slightly.
The summary of the bank’s policy-setting meeting at which it kept interest rates steady was shared on Thursday.
Warning of “uncertainties” amid geopolitical developments and elevated energy prices in March and April, the Central Bank of the Republic of Türkiye (CBRT) said, “Leading indicators suggest that in April, consumer prices will be driven by energy and food prices, whereas the underlying trend will increase slightly.”
“Domestic energy prices posted a substantial rise on account of price increases in natural gas and electricity for households,” it added.
Official inflation data is due to be released next week. The annual inflation rate in March was at 30.87%, compared to 31.53% in February.
“Brent crude oil prices generally trended upward in both March and April,” the bank noted.
On Thursday, the prices reached the highest since the war between the U.S., Israel, and Iran started two months ago, touching briefly $126 before easing.
Among others, the CBRT also pointed out that risks related to the Strait of Hormuz, coupled with the search for alternative routes, “led to longer lead times, and security risks caused higher insurance premiums and freight rates in March. “
Moreover, it said that inflation expectations and pricing behavior continue to pose risks to the disinflation process, as it cited that inflation expectations rose in April.
“Given the size of price volatility and supply constraints in commodities, the uncertainty over the inflation outlook has substantially increased. The effects of these developments and domestic energy prices on the inflation outlook through the cost channel and economic activity are being closely monitored,” it said.
The central bank also said it would tighten its policy stance “if there is a significant and persistent deterioration in the inflation outlook.”
“In case of a significant and persistent deterioration in the inflation outlook, which can also be driven by the recent developments, the monetary policy stance will be tightened. The committee reiterated that it remains highly attentive to upside risks on inflation.”
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