The Middle East war is testing the Gulf's ambitions to become an AI hub

The Gulf's ambition to become a global hub for artificial intelligence is being tested, as the potential for a prolonged conflict in the Middle East raises questions over energy security, infrastructure resilience and investor confidence.

Before the war began in February, the United Arab Emirates, Saudi Arabia and Qatar were racing to position themselves at the center of the AI boom, leveraging abundant, low-cost energy and strategic geography to encourage hyperscalers to build out vast data center networks there.

But two Amazon data centers in the UAE were targeted early in the war and, nearly three months later, oil prices remain around $100 a barrel and the Strait of Hormuz remains closed.

While investors and companies involved in AI infrastructure in the Middle East told CNBC they were bullish about the region's future in the sector, rising geopolitical risk in the region could impact AI projects, analysts said. Investment decisions into some data center projects in the region have been paused or are taking longer as the conflict continues.

"The ongoing conflict in the Middle East is putting AI infrastructure on the literal front lines in ways that even a year ago, two years ago, would have seemed out of the realm of possibility," Trisha Ray, associate director and resident fellow at the Atlantic Council's Geotech Center, told CNBC's Dan Murphy on May 15.

The war has "marked a shift," she added. Risk management used to focus "on cyber threats, digital disruptions, not kinetic threats. And this has changed with the drone strikes," said Ray.

The AI bet

In the years before the war, Gulf nations made advanced technology a core pillar of their plans for economic diversification, from sovereign-backed investment vehicles to national AI strategies. At the core of this pitch is energy. The Gulf's access to abundant hydrocarbons, large-scale generation capacity and relatively low-cost electricity made it an attractive destination for power-intensive data centers that form the backbone of AI and cloud computing.

The UAE backed major initiatives through its AI investment platform MGX and local AI "champion" G42, both founded by the $385 billion Abu Dhabi investor Mubadala. Saudi Arabia plans to deploy tens of billions of dollars into AI and data infrastructure as part of Vision 2030 through HUMAIN, backed by the Kingdom's nearly $1 trillion Public Investment Fund. Qatar is also investing heavily in AI and established a national firm called Qai, a subsidiary alongside the nearly $600 billion Qatar Investment Authority, in partnership with Brookfield.

Against this backdrop, companies like Cisco, Oracle, Amazon Web Services (AWS), Microsoft and Google expanded their investments in projects and data centers in the region alongside local partners.

But regional conflict is giving AI project builders pause for thought.

Oaktree-owned Pure Data Center Group CEO Gary Wojtaszek told CNBC in April that the company had temporarily paused investment decisions in the Middle East, while continuing "planning and discussions" around projects.

Timelines are also increasing. Investment decisions "are taking longer because of the nature of the risks associated with effectively being in a region that has some serious threats," said Mark Richards, partner at BCLP, a law firm that advises large-scale data center projects, including in the Middle East.

Risks that weren't part of the original investment thesis were now being priced as part of that process, he told CNBC.

Gulf markets like the UAE have long offered relatively low industrial power prices, around $0.11 per kWh versus $0.25–$0.40 or more in parts of Europe.

Since the outbreak of war on Feb. 28, global energy markets have been rocked and the closure of the Strait of Hormuz has escalated into what the International Energy Agency has called the largest oil supply disruption in history.

Brent crude surged more than 55% from around $72 a barrel to nearly $120 at its peak over the last three months.

Even in energy-rich states, cheap energy is no longer guaranteed: Gas prices in the UAE jumped 30% for consumers in April after more than a month of sustained higher oil prices.

For the Gulf, the implications are increasingly structural. Tighter energy markets and rising volatility are pressuring governments to pass through costs, particularly to large industrial users such as data centers.

Like energy assets across the region, data centers are becoming as strategically important as pipelines. Attacks on AWS data centers in the UAE and Bahrain early in the war were unheard of, and showed the vulnerability of assets which remain a key priority of Gulf governments.

The Atlantic Council's Ray added that data centers would need to "physically harden" the sites, and maybe even build them underground. But she also said they should consider "diversifying" by building them outside the country, "because the data center infrastructure the UAE needs to meet its global and regional ambitions, need not just be located in the UAE."

When asked if it had paused investment decisions in the region, Amazon pointed CNBC to CEO Matt Garman's comments in early April about the company's "excitement about investing long term in that region is just as strong as it's ever been." Google and Microsoft declined to comment. Cisco and Oracle did not respond to a request for comment.

The region's major AI players insist the war won't dent in their ambitions.

A spokesperson for G42 told CNBC the company's "direction remains unchanged," and their "conviction has only deepened."

Its statement added that AI would "become as foundational to economies and societies as electricity." Infrastructure of that importance has to absorb difficult periods without losing its shape," G42 added.

Tareq Amin, the CEO of Saudi Arabia's HUMAIN, told CNBC the company's "ambition has never been limited to building data centers. We are building the full AI stack - from critical infrastructure and compute, to models, platforms, and AI applications."

Amin added that "Saudi Arabia's scale is a strategic advantage," emphasizing its "large geography" and "abundant energy resources, world-class connectivity corridors, and the ability to build long-term resilient AI infrastructure at scale."

"The future AI economy will require nations to think beyond isolated facilities and toward integrated infrastructure ecosystems designed for reliability, scalability, and global reach," Amin added.

BCLP's Richards told CNBC that the firm is still seeing inbound enquiries for large-scale data center projects in the Middle East. Pure DC's Wojtaszek said the company was "bullish" about the region and was progressing planning and investment discussions about projects in the UAE and Saudi Arabia.

But the conflict has "shattered the illusion of long-term stability in the Gulf," changing the value of investing in the region, Aalok Mehta, director at think tank the Center for Strategic and International Studies, told CNBC.

Future data centers will likely be more expensive and slower to come online because of the costs of facility hardening and anti-drone technology, higher insurance rates and possible long-term supply chain issues, he said.

"The region has demonstrated its ability to change and adapt," Tara Davies, EMEA co-head of private equity company KKR, told CNBC in Abu Dhabi earlier this month.

"AI is changing every month at the moment," she added. "Despite the short-term volatility in the region and the short-term uncertainty, this is a game that lasts decades."