The Iran war’s shock to oil and gas prices has, understandably, dominated much of the recent market news. Though the downstream effects have yet to be fully understood, there is no question that we are in the throes of the greatest energy crisis in modern history, with significant implications for every facet of the modern economy. One particular aspect that is just beginning to be appreciated is the financial one. The onset of this latest Persian Gulf war is poised to severely disrupt a channel of liquid investment, known as the petrocapital cycle, which is vital to sustaining modern finance as we know it. Its failure to operate effectively could inflict a significant credit crunch on global markets just as liquidity and available credit is becoming even more needed than ever.
Understanding why the petrocapital cycle, which was first examined thoroughly in el-Gamal and Jaffe’s Oil, Dollars, Debt, and Crises: The Global Curse of Black Gold, may soon be in jeopardy first requires a quick refresher on what this cycle is and how it operates. In brief, the petrocapital cycle is the flow of finance from oil producers to the financial-system. It is largely sustained by regular infusions of capital from oil-exporting regions, like the Persian Gulf, whose rulers have long invested a significant share of their profits in the international financial markets. These investments provide markets with capital, preserve the fortunes of the oil-exporting elites, and keep the domestic economies from overheating due to excess spending at home.
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This present form of the petrocapital cycle first came into existence in 1973 when OPEC’s member-states found themselves awash in the windfall profits reaped from the 1973 Oil Shock’s quadrupling of oil prices. Petrocapital, since its emergence, has grown to be an influential force in global markets, and fluctuations in its availability have fueled credit shocks. One of the first such examples of an oil-induced financial crisis was the Debt Crisis of 1982.
The story of the debt crisis begins with the 1979 Oil Shock, which doubled the price of oil overnight and created the conditions for the anti-inflationary Volcker Shock. The final nail in the proverbial coffin was Saddam Hussein’s 1980 invasion of Iran and the decision by the Gulf monarchs to shift their investments from banks overseas to funding Iraq’s war against the newly-formed Islamic Republic of Iran. This combination of an oil shock, credit drought, and inflationary pressures forced sovereign borrowers in Latin America into default with lasting consequences.
While conditions around sovereign borrowing and international finance have changed, one element that has become more prevalent is the role of petrocapital. Petrocapital in the 70s and 80s was best understood as a regular flow of invested profits from oil exporters. As globalization set in and Persian Gulf leaders sought to diversify their economies away from oil, a growing stream of Middle Eastern capital originating from financial hubs like Dubai and Kuwait has since emerged. Countries like the United Arab Emirates have further encouraged these trends by courting investment in real estate and offering sanctuary for tax exiles, promises which were premised on the assumption that the Persian Gulf would remain stable, peaceful, and a safe place to invest or relocate. Increasing diversification has only encouraged these trends, and the Persian Gulf, before the war, was hailed as a major center for investment and financial capital, as attested by the estimated $1.4 trillion of assets held by the United Arab Emirates’ financial sector as of November 2025.
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All these benefits vanished on February 28th. The closure of the Strait of Hormuz has, unquestionably, posed a serious problem for thefinancial positions of every Gulf petro-state. Fitch Ratings, on March 5th, assessed the sovereign exposure of the Gulf monarchies and argued that if the Strait was only closed for a month and no serious damage was inflicted on oil infrastructure, then each state would suffer a mild downturn, due to lack of revenues, which would swiftly rebound once the war ended. Unfortunately for these sovereigns and Fitch, both these things appear to be true between the Iranian minefield and growing attacks on critical oil infrastructure. This, therefore, suggests everything downstream of these revenues, including the region’s financial hubs, will suffer.
These risks are compounded by the problems created by a lack of physical safety. Along with being fiscally at risk, banks in Dubai have become directly at risk of military strikes, with likely consequences for their ability to operate. On March 2nd, the Abu Dhabi stock exchanges closed until March 3rd due to the risk of drone strikes. The Iranian military made this danger real on March 11th when they announced financial centers were now valid targets of war, an escalation which prompted major international banks like HSBC to close their offices in the Emirates and Citigroup and Standard Chartered to order employees to work from home. Two days later, the Dubai International Finance Center was targeted for drone strikes. Such pressures, along with the direct risks to life and property, are likely to reduce Gulf banks’ ability to effectively respond to changing market conditions.
This disruption to both capital flows and regular operations comes just as global credit markets are already facing growing signs of turbulence. Global stock markets have posted steady declines as rising tensions in the region have fueled fears of a global energy crisis. This comes as debt markets show growing stresses, with one OECD official stating inflationary pressures, like those driven by the present energy crisis, would be a “big stress test”. Private credit markets are also increasingly running low on lucrative contracts and have been forced into tight competition over less and less desirable bids. Bond markets, as recently as the end of February, were also showing signs of high demand in the face of growing economic uncertainty, suggesting there already was a lot of money chasing a dwindling pool of safe assets before the war began.
It, therefore, appears that the growing prominence of the Persian Gulf in global finance and present market conditions have created a vulnerability which has only emerged thanks to the unthinkable becoming reality. This oil shock may be the first of many interrelated economic shocks that are about to be unleashed on the global economy, constrict the flow of private capital into investment-hungry markets, and exacerbate the existing price crisis. Investors, policymakers, and planners should prepare for such conditions and the increased volatility that will be inherent to smaller, hungrier markets.
By Ryan Smith for Oilprice.com
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