U.S. Embassy Struck as Conflict Widens

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Fighting kicks up another notch across the Middle East, leading the U.S. to pullback 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.

The 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

in 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.

The 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 will 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.

For more on that, I'm joined by Rohan Maya,

senior analyst for the Middle East in North Africa at Oxford,

Analytica, a part of Dow Jones, the publisher of the Wall Street Journal.

Rohan, according to our reporting, some Gulf states could burn through their air defenses

within days.

I'm just a painting 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?

Well, look, certainly the Gulf states are in an incredibly difficult position.

They've sought a date on with Iran since 2023,

and they've effectively attempted several times to mediate and de-escalate tensions

between the US and Iran, and yet have now found themselves very much on the front line of the

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, and that expression has been made several times

that it would seek to expound 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 arise. It seeks that precise economic impact in order to push the Gulf neighbors to start

pressing Washington for an end game. Now, the civil aligning, 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. 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 of damage, it's really the psychological impact that has been quite

profound. The barrage of strikes threatens to hit the soft appeal of the Gulf states.

And Iran, that appeal is not just for tourists and for ex-patriots, 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. So the economic impact here could continue to grow, I imagine, as well.

Yes, for Dubai in particular, it's marked itself as a business and tourism hub.

Noha sees steady streams of meetings and events. The closure of aerospace and 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 Paramos and disruption in cargoes by

there. And the Amazon issue that you've cited, coupled with the Qatar and the Saudi energy strikes.

Yesterday, the strikes reported on Qatar's gas facilities. Saudi Arabia announced a temporary

shutdown of the Rastunura oil refinery. And one does wonder whether we're now significantly

going up the escalation now, whether the Iran 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 these attacks must not go unanswered. So definitely, the military

question is being put out there. 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

alternative 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. And therefore, the economic calculus of that military option is probably

awaying quite heavily on the GCC leaders of this point in time. But I think the involvement might

be more about expanding the access of the US to their territories for that use to then be made

to attack it on. But I think the emphasis will be on defense more so than offense at this point.

I know they detuned and the rapprochement was probably dead as we speak, but there needs to be

a way to handle and manage it on in the long term. And that might not be through being actively

involved in attacking the country. I've been speaking to Rohan May, a senior analyst for the

Middle East and North Africa at Oxford Analytica. Rohan, thank you so much for being with us on what's

news. Thank you. The first flights have begun taking off in 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

sought with the three US-operated fighter jets that were shot down by friendly fire in Q8.

Now, 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. The 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 of 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. That'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 percent, 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?

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Government 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 ends up driving up wages and things like that. So it can

really spiral into a larger inflation impact. And should inflation in fact start to rise, investors

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

at 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. It 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 Paramounts rating to junk status,

warning that the deal's massive financing needs and integration challenges could cause

the company to miss its financial targets. And 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 Killhoff, and I'm Luke Vargas for the Wall Street Journal. We will be back

tonight with a new show. Until then, thanks for listening.

Oh, sometimes we walk that too. Wherever you're coming from, we're right there with you.

Wherever you're going, we'll get you there. CLA, CPAs, consultants, and advisors, learn more

at CLAconnect.com slash with you.