Conflict in the Middle East has been a virtually constant source of uncertainty for investors, yet it has rarely, if ever, had a lasting impact on U.S. financial markets. Consider that markets have performed well over the past decade despite two U.S.-led wars in the region.
Uncertainty in the Middle East could temporarily affect markets, however, should it cause oil prices to spike. Iraq is presently the second largest crude oil producer among OPEC nations, with output today exceeding pre-invasion levels. Compromised Iraqi production would have a much greater effect on global markets than, for example, the 75% decline in Libyan oil production following that countrys 2012 upheaval. There are also questions surrounding OPECs ability and willingness to boost supplies in the event that Iraqi production is curtailed.
On the other hand, the renaissance in U.S. energy markets could help to cushion the economic blow to the U.S. from an oil shock overseas. Increased domestic oil production (growing by 25% per year) and the ongoing ban on crude oil exports have created a disconnect between U.S. and overseas oil prices (chart). This spread could widen if overseas turmoil pushes overseas oil prices higher.