(FORTUNE Magazine) – War, we all know, is hell. It's not too good for economies either. The continuing instability in Iraq and the renewed fighting between Israelis and Palestinians are having corrosive effects on business throughout the Middle East and beyond. The Bush administration had hoped that the liberation of Iraq and the so-called roadmap to peace between Israel and Palestine would get economic juices flowing in the region and boost trade. Washington sent chief trade rep Robert Zoellick to a World Economic Forum meeting in Aqaba, Jordan, in June to talk up the prospects of the region and a new free-trade zone, hoping to conjure animal spirits. It also hoped to get Iraqi oil flowing quickly, bringing down the price of crude and adding stimulus to the global economy.

None of that has happened. It's true that in the immediate aftermath of the war, there were signs of hope. Turkey's tourism business, hammered in the run-up to the conflict, showed 10% year-on-year increases in the months just after it. But now, for the most part, the only people who can be enjoying what's going on are the oil sheikhs, America's contractors of choice in Iraq--led by Halliburton and Bechtel, both of which recently had the size of their contracts increased--and maybe the makers of car bombs.

Take oil. With Iraqi production at just half of prewar levels and OPEC sticking to its quotas, prices have hung at around $30 a barrel, with little likelihood that they will come down anytime soon. That's fine for Saudi Arabia, Kuwait, and the UAE; stock markets in all three countries are up briskly this year. But for everyone else, that is not good news. Farid Abolfathi, an economist at Global Insight, a consulting firm in Lexington, Mass., says there is a "depressingly consistent inverse relationship between the price of crude and consumer confidence." Though consumer sentiment has been strengthening in the U.S., he worries that persistently high oil prices could reverse that. And in struggling economies in Europe and Japan, high crude prices are particularly burdensome.

For non-oil producers in the Middle East--Israel, Jordan, Turkey--all of which had hoped a change in geopolitical mood would trigger better times--the late summer has been bleak. Investment, both domestic and from abroad, remains at low levels. Tourism, important to all three, is a disaster. The only bright spot is that Israel's once vibrant high-tech sector is showing signs of life again, with exports up 12% since May.

Optimists believe the region has hit bottom. "This is the worst, the low point," says Abolfathi. Echoing L. Paul Bremer, the chief civilian administrator in Iraq, he says he thinks Iraqi oil exports will increase sharply in three to six months, as oilfield security improves. Others say that despite the lack of security, Jordanian businessmen are flocking to Iraq to do deals. The key now, Bremer told FORTUNE in July, is for Iraq's governing council to get rid of suffocating Saddam-era restrictions on foreign investment. But at this point, skeptics rule the day. "We'll believe that when we see it. Maybe," the government-relations manager at a European pharmaceutical giant puts it. There is, as market mavens would say, a lot of room for upside surprises in the Middle East. The problem is, all the surprises in the region lately have tended to be in the other direction. --Bill Powell