Gulf Nation AI Ambitions Face Risks at Home and Abroad

Saudi Arabia's Crown Prince Mohammed bin Salman

This week’s newsletter is written by Ziad Daoud, chief emerging markets economist at Bloomberg Economics in Dubai and a senior fellow at the Harvard Kennedy School’s Belfer Center. Your feedback is welcome, and if you aren’t yet signed up to receive this newsletter, you can do so here.

For years, Saudi Arabia used its flagship investment conference to sell its next big idea. In 2017, it was a futuristic city. Last year, it was less Neom, more artificial intelligence. This year, escalating Houthi attacks forced it to postpone the conference itself, originally scheduled for Oct. 26.

Even after the US-Israel war with Iran began in late February, Saudi Arabia designated 2026 as The Year of AI. Crown Prince Mohammed bin Salman invited “all dreamers, innovators, investors and thinkers” to help the kingdom “unlock the value of data and AI.”

Saudi Arabia isn’t alone in betting on AI. Most of its Gulf neighbors have similar ambitions. And the stakes extend beyond the region, as global demand for computing power grows. The Gulf hopes to meet that demand by exploiting its natural advantages: available land, relatively cheap labor and plentiful energy.

AI could also help Gulf leaders achieve their long-standing goal of reducing oil dependence. But like Saudi Arabia, they all face the same problems, and the same threats. While postponing a conference is an inconvenience, large data centers and fixed power grids can’t easily be moved out of harm’s way.

This week in the New Economy

War-torn Europe propels India’s resurgent defense industry.Turkey delivers cautious rate cut, leaves room for another.South Africa unveils fiscal anchor in “bond-friendly” budget.Ecuador’s Trump-allied president arrests left-wing leader.Bloomberg Opinion: Indonesia rate miss makes a bad week worse.

The AI ecosystem has three broad layers, each dominated by different firms. First is hardware, including chips made by Nvidia, TSMC and others. Second is infrastructure, such as the data centers built by Amazon, Google and Microsoft. Third is models, where companies led by OpenAI and Anthropic set the frontier.

Much of the Gulf’s AI push has focused on data centers. ‎The region has partnered with global firms to develop the ‎infrastructure. It has created domestic companies, ‎including Saudi Humain and UAE-based Khazna, to ‎further the cause. And it’s working with Washington to ‎secure advanced chips to operate the centers.‎

The ambition is big, and the expansion is already underway. Saudi Arabia and the UAE almost tripled their data center capacity between 2020 and 2025, according to BloombergNEF estimates. And that’s just the beginning: BloombergNEF expects capacity to grow another three- to six-fold by 2035.

AI’s economic effect on the Gulf has been negligible so far. The first benefits of data centers come from construction activity. Yet both top-down statistics and bottom-up calculations point to the same conclusion: data-center construction has barely moved the needle for Gulf economies.

The Gulf’s AI bet was never about the past five years: it’s about the next decade. And the bigger prize isn’t construction, but income from customers using the data centers. For AI to finally show up in economic statistics, the Gulf must meet its ambitious growth targets and avoid slippage.

But slippage isn’t the only risk, as Gulf states could also end up competing with each other. In recent years, they’ve targeted the same sectors to move away from oil: petrochemicals, logistics, tourism and finance. That has sometimes led to duplication and excess capacity. AI could face the same problem as countries race to build its infrastructure.

The Iran war adds another layer of risk. Builders and customers can no longer worry only about cybersecurity. They must also protect expensive data centers from physical attacks: strikes tied to the widening war have already hit facilities in the region, potentially destroying some data forever.

The Gulf can invest in protecting its AI infrastructure, but stronger security could reportedly raise costs by 5% to 7%, eating into profits. And even then, there’s no guarantee those investments can safeguard facilities against increasingly sophisticated military technology.

Another option is for Gulf nations to build some data centers abroad. But that would undermine much of their competitive advantage. The region would miss out on the construction boom and lose the benefits of its abundant resources.

That leaves the Gulf with a difficult choice: build at home despite the risks, or abroad despite the costs. When Saudi Arabia reconvenes its flagship investment conference, its next big idea may be less glamorous than futuristic cities: data centers that can withstand missile and drone attacks.

More from Bloomberg

Enjoy New Economy?