If you have been paying attention to international news over the last few weeks, you are most likely aware that the Middle East is once again heating up. While the civil war in Syria continues to rage, militant Islamic fundamentalists have risen up in Iraq (a group known as ISIS), and are slowly trekking toward Baghdad. While this is obviously a serious foreign policy issue that requires careful analysis, and for which the various diplomatic and military options should be weighed carefully, it also highlights the importance of non-financial knowledge; that is, access to, and the interpretation of, information beyond the financial markets.
Iraq is the fifth largest oil exporter in the world and has the second largest proven supply of oil reserves, after Saudi Arabia. Over the past several years, Iraq has been slowly increasing its oil production, as the infrastructure is developed to make use of its massive reserves. But the recent conflict threatens to seriously impact Iraq’s oil production; at the very least, it will halt or drastically reduce the increase in production. This has already affected the world price of oil, but the long term-impact is more serious: if Iraq’s increase in production capacity grinds to a halt (and possibly even decreases), it could noticeably reduce worldwide production over the next decade. While it is impossible to know how the scenario in Iraq will play out, it opens up calculated investment opportunities in the oil and energy sectors, and has the potential to negatively impact oil-reliant companies.
It is important for investors to understand the potential geopolitical factors that could impact their returns. It is true that commodities such as oil and other natural resources — as well as companies that extract, transport, and refine these commodities — are particularly vulnerable to regional turmoil, as they are only found in certain areas. But other companies can also suffer from natural and man-made disasters: several years ago, a series of massive floods swept through Thailand, home to most of the factories that produce components for computer hard drives. As a result, the price of hard drives spiked worldwide, regardless of the manufacturer. In addition to violent upheaval, changes in political and regulatory environments can also have a major impact on companies that operate in those respective locations.
This is not to say that investors should, or even can, investigate every possible contingency before investing. But it is important to be aware of potential influences — whether political, environmental, or regulatory — and how the world beyond Wall Street affects your portfolio.