U.S. not exiting Middle East, but sharing roles

In the U.S. midterm elections, AI investment and data center issues emerged as key agendas in Texas. The increased electricity demand from data centers led to complaints about rising electricity bills, drawing significant attention from voters. In addition, rising gasoline prices due to the Iran war became a core issue emphasized by former President Trump.

This agreement even led to interpretations that the U.S.-led order in the Middle East had ended. The alliance of the three countries signals a new shift in the existing Middle East security system.

This change is largely consistent with the direction the U.S. has long desired. It is also a process for regional countries in the Middle East to secure their own security leadership.

War began on February 28 when the United States and Israel launched airstrikes on Iran, and Iran retaliated by blockading the Strait of Hormuz. This led to a ban on passage through the Strait of Hormuz and disruptions in oil transport. Six months of conflict after the war brought tensions in the Middle East to a peak.

Iran retaliated against U.S. strikes by attacking Middle Eastern countries. These nations, highly dependent on the U.S. for security, found themselves in a dilemma due to the absence of independent security measures.

The first was the Gulf Cooperation Council (GCC), which served as a regional consultative body. The second was the U.S. military, with the Gulf region's military defense provided by the U.S. Fifth Fleet and its network of military bases. The third was the Abraham Accords, which handled intelligence and technology exchange.

This made effective responses to pan-regional crises difficult.

The agreement included a NATO-like clause stating that an armed attack on one of the three countries would be considered an attack on all of them. Saudi Arabia possesses vast capital and influence, Turkey has military power and a defense industry, and Pakistan holds nuclear weapons technology, forming a complementary combination. This is interpreted as Saudi Arabia's choice for an alternative insurance policy as the U.S. security umbrella became uncertain.

On August 31, the foreign ministers, defense ministers, and chiefs of staff of the three countries met in Istanbul for their first senior committee meeting. At this meeting, the alliance's name was confirmed as the 'Mecca Defense Alliance,' and it was decided that the secretariat would be located in Riyadh, Saudi Arabia. It was agreed that Pakistan would assume the role of the first secretary-general. Furthermore, specific tasks such as ensuring interoperability and cooperation in the joint defense industry were set, solidifying the practical foundation of the alliance.

Oman, a southern coastal nation of the Strait of Hormuz, physically shares the strait with Iran and has long served as a conduit between the U.S. and Iran. Qatar hosts the largest U.S. air base in the Middle East while also sharing gas fields with Iran, giving it ties to both sides. Oman is mediating negotiations for an interim shipping route agreement in the Strait of Hormuz, while Qatar is engaging in diplomatic mediation to bring Iran to the negotiating table by discussing terms for dialogue between the U.S. and Iran. Thus, a structure is forming where Saudi Arabia's deterrence efforts are paralleled by Oman and Qatar's negotiation facilitation.

The Middle East's security structure is evolving into a system of shared roles rather than a military alliance. The U.S. maintains only its elite military assets, such as naval power, serving as the ultimate protector. Saudi Arabia, on the other hand, shares the role of everyday deterrence by raising the costs when Iran exerts influence and providing Iran with an exit. This indicates that the U.S. is not completely disengaging from the Middle East, but rather shifting to a structure where it retains ultimate military deterrence while regional countries manage daily crises and mediation.

However, as wars and maritime blockades recur, investors demand higher risk premiums for Saudi assets. Therefore, Saudi Arabia has an economic objective to secure additional security options beyond the overwhelming U.S. security partnership, build its own deterrence, thereby lowering geopolitical risk premiums and reducing capital procurement costs.

The strategy is that Iran will not put down its biggest bargaining chip—the opening of the strait—before receiving economic compensation. Internally, moderate voices are increasingly growing in Iran due to accumulated economic losses.

Roles such as striking Iranian drone facilities remain exclusively within the capabilities of the U.S. military, difficult for regional countries to perform. Conversely, mediation roles are being transferred and shared by countries like Oman and Qatar.

There is no guarantee that oil prices will structurally decrease even if the Middle East stabilizes. Oil prices are determined by a complex interplay of various factors, including OPEC supply, global demand, and the value of the dollar. Security is just one of these factors, so resolving security issues does not automatically dictate the direction of oil prices.

Saudi Arabia has set a target under 'Vision 2030' to source over half of its military expenditure domestically by 2030. Indeed, Saudi Arabia's defense localization rate has significantly increased from 4% in 2018 to 25% in 2024. Recently, contracts worth approximately 12 trillion won were signed at the Riyadh World Defense Show, indicating active investment and localization efforts in the defense industry by Gulf states.

Gulf states have a growing incentive to increase investment in securing alternative routes, such as Red Sea ports and pipelines, and inland logistics for eastern ports. As these investments continue, the entire security infrastructure, including power, telecommunications, ports, and pipelines, is expected to benefit, in addition to the defense industry. The importance of existing alternative routes like the Red Sea pipeline, Yanbu port, and Fujairah port is further increasing.

The first thing investors should watch is whether dialogue between the U.S. and Iran, mediated by Qatar, resumes. If talks resume, it's important to see if Iran's demands, such as sanctions relief or frozen assets, are addressed. Next, the actual opening of the interim route in Hormuz is crucial. If the interim route opens, changes in maritime insurance premiums should be checked. Furthermore, understanding the specific schedule of Red Sea operations, changes in Saudi port premiums, and joint training schedules is vital to determine the actual timing of defense industry orders.