Assessing Geopolitical Risk in the Middle East: Implications for Defense and Energy Sectors

The Middle East remains a fulcrum of global geopolitical risk in 2025, with escalating tensions between Israel and Iran, shifting regional alliances, and the fragility of energy infrastructure creating a volatile landscape for investors. As the region's defense and energy sectors intertwine more closely, strategic positioning for investors must account for both immediate volatility and long-term resilience.

Energy Sector: Navigating Volatility and Diversification

The Israel-Iran conflict in June 2025 sent oil prices surging to $80 per barrel, underscoring the region's role as a critical energy chokepoint, according to an ORF Middle East analysis. While OPEC+ spare capacity and advanced intelligence tools have temporarily insulated markets from severe disruptions, according to a KPMG forecast, the potential for a Strait of Hormuz blockade by Iran remains a persistent threat. Gulf producers like Saudi Arabia and the UAE have preemptively secured alternative transportation routes, including oil pipelines and ports bypassing the Strait-the ORF analysis also details this strategic pivot toward energy security.

Gulf national oil companies (NOCs) are also expanding globally, with Abu Dhabi National Oil Company (ADNOC) and QatarEnergy investing in U.S. energy assets and carbon capture technologies, according to an MEI recap. This trend reflects a broader shift toward diversifying energy portfolios and reducing reliance on regional infrastructure. Meanwhile, the KPMG 2025 geopolitical risk analysis ranks energy sector vulnerabilities as the top concern for 55% of respondents, emphasizing the need for investments in renewables and cybersecurity.

For investors, the energy sector's dual challenges-short-term volatility and long-term decarbonization-demand a balanced approach. Opportunities lie in Gulf NOCs' global expansion, green hydrogen initiatives (such as the U.S.-Japan-Australia Green Hydrogen Initiative), and energy storage innovations like next-generation batteries, as highlighted by a World Energy Report analysis. However, exposure to regional conflicts and infrastructure risks necessitates hedging through diversified supply chains and partnerships with resilient players.

Defense Sector: Escalating Expenditures and Strategic Realignment

The Middle East's defense landscape has been reshaped by the Israel-Iran standoff and the U.S. military's expanded presence, including the deployment of B-2 stealth bombers and intensified airstrikes in Yemen, as described in the ORF analysis. Iran's rejection of Western engagement on its military programs and the collapse of the Assad regime in Syria-ushering in Hayat Tahrir al-Sham (HTS)-have further fragmented regional alliances, a dynamic also noted in the MEI recap and World Energy Report. These dynamics are driving increased defense expenditures, particularly in Gulf states and Israel, as actors seek to counter asymmetric threats and secure critical infrastructure.

The U.S. withdrawal from Syria has also heightened concerns about Iranian proxy networks, prompting regional players to forge new partnerships. For example, Gulf countries are deepening defense ties with European and Asian partners to offset U.S. strategic ambiguity, as reported by MEI. Investors in defense stocks should prioritize firms with expertise in cyber warfare, drone technology, and logistics, as these capabilities are increasingly critical in asymmetric conflicts.

Strategic Positioning for Investors

The interplay between energy and defense sectors demands a nuanced investment strategy. In the energy space, prioritizing Gulf NOCs and renewable infrastructure projects (e.g., solar farms in the UAE) offers exposure to both geopolitical resilience and the energy transition. For defense, companies supplying advanced surveillance systems, cybersecurity solutions, and portable energy systems for military operations are well-positioned to benefit from regional spending trends.

However, risks remain. The KPMG report highlights regulatory fragmentation and trade disputes as key challenges, while analysts such as Rystad Energy warn that unresolved conflicts could disrupt energy trade routes. Investors must also monitor political shifts, such as the rise of Sunni groups in Syria and the waning influence of Shia militias, which could alter regional power balances (as examined by the World Energy Report).

Conclusion

The Middle East's geopolitical turbulence in 2025 presents both risks and opportunities for investors. While energy markets face short-term volatility, Gulf NOCs and international collaborations are laying the groundwork for long-term stability. In defense, the region's shifting alliances and technological demands create a fertile ground for innovation-driven firms. A strategic, diversified approach-balancing exposure to energy resilience and defense modernization-will be critical for navigating this complex landscape.