Iraq’s ISIS Crisis: What Investors Need to Know

Iraq’s government is in danger of falling to a radical militant group known as ISIS. Here are the key facts investors need to be aware of.

Jun 18, 2014 at 1:20PM

ISIS, or The Islamic State in Iraq and the Levant, also known as ISIL, a militant group once deemed too violent and radical by al-Qaeda, is currently sweeping across both Iraq and Syria in an aggressive push to unify both nations into a single state. Both countries are falling fast -- Syria has been weakened by more than three years of civil war, and the new Iraqi government has failed to stabilize the fractured nation after U.S. troops left three years ago.


Source: Wikimedia Commons.

Untrained and unmotivated Iraqi soldiers are surrendering without a fight, allowing advancing ISIS forces to take over Mosul, the second-largest city in Iraq, and large parts of eastern Syria while pushing south toward the borders of Baghdad.

Iraqi Prime Minister Nouri al-Maliki has requested aid from the U.S., but President Obama has refused to grant it, stating that ISIS' advance should be a "wake up call" for the Iraqi leadership. Despite those strong words, the U.S. is still getting involved. President Obama has already deployed 275 troops to Baghdad for embassy security, and Secretary of State John Kerry has suggested an uneasy alliance with Iran to hold back ISIS' advance.

In times of turmoil like these, investors should "hope for the best, but prepare for the worst." Let's take a closer look at what sectors and businesses will most likely be affected by the ISIS crisis.

How much oil do Iraq and Syria produce?
The biggest immediate concern is oil. Iraq is OPEC's second-largest producer of crude oil, pumping an average of 3.4 million barrels a day last month, and accounts for 3.7% of oil production worldwide. Meanwhile, Syria's oil reserves have been declining during the past several years, and were last recorded at 333,900 barrels per day in 2011.

The Kirkuk-Baniyas crude oil pipeline once connected both countries, but it was damaged during the 2003 invasion of Iraq. In 2010, Iraq and Syria agreed to build two new Kirkuk-Baniyas pipelines -- one with a capacity of 1.5 million barrels per day in heavier crude, and another with a capacity of 1.25 million barrels per day in lighter crude.

So far, oil prices have risen on concerns about the escalating crisis, but haven't spiked because roughly 90% of Iraq's oil is located in the south and in Kurdish-controlled areas, which have not been affected by the battles. Since Iran, which supports al-Maliki's government, borders Iraq's southern oil fields, it's unlikely that ISIS can directly disrupt the Iraqi oil supply.


Source: Wikimedia Commons, author's edits.

But in the event that ISIS wants to "liberate" the country from U.S. energy interests, Chevron (NYSE:CVX) would be the most well-protected, since it operates exclusively within the semi-autonomous Kurdish area. ExxonMobil and Occidental Petroleum could both lose oil fields. Oilfield service providers like Halliburton and Schlumberger would likely suffer the most.

Investors who want exposure to rising oil prices without trading commodity contracts, or investing in individual companies, can consider ETFs, or exchange-traded funds, like United States Oil Fund (NYSEMKT:USO), which tracks the movements of West Texas Intermediate (WTI) light crude oil, or PowerShares DB Oil Fund (NYSEMKT:DBO), which tracks the value of future contracts on light crude.

USO Chart

Source: Ycharts.

Are gold and silver now viable investments?
In times of political uncertainty, gold and silver prices tend to rise for two reasons. First, both metals are perceived as safer than stocks and other investments. Second, higher oil prices often signal inflation, which, in turn strengthens gold. Silver generally follows gold, thanks to its dual role as both a precious and industrial metal.

Gold prices have consistently declined since peaking at $1,890 per ounce in August 2011. The price has since declined 32%; but, at the same time, the S&P 500 has advanced 73%. Therefore, if the ISIS conflict escalates, and causes oil prices to rise and oil-dependent businesses to buckle under the pressure, gold and silver could be good ways to hedge your portfolio if the broader market comes under selling pressure.

Just as with oil, a simple way to invest in both metals is through two ETFs -- SPDR Gold Trust (NYSEMKT:GLD) and iShares Silver Trust (NYSEMKT:SLV), which attempt to track the daily prices of the two metals.

SLV Chart

Source: Ycharts.

Avoid the airlines
If oil prices rise and inflation kicks in, many businesses will take a hit on their bottom lines. Restaurants will report that the cost of raw materials has risen. Retailers will state that higher prices at the pump result in less disposable income. Rising oil prices will also affect the cost of plastic materials, PVC pipes, steel production, lumber, and asphalt -- which will drag down the construction industry. However, the airline industry could be hit the hardest of all.

In 2008, when oil hit a historical high of $145 per barrel, seven U.S. airlines filed for bankruptcy. In the four years prior to that peak, six filed for bankruptcy, including Delta Airlines. The financial meltdown of 2008 and 2009 then wiped out many of the remaining players, including American Airlines in 2011. Only a few, such as Delta and American, were able to exit bankruptcy protection.

Airlines have tried to keep history from repeating itself with tactics like fuel hedging (buying fuel at a fixed cost via a commodity swap or option), and buying more fuel-efficient aircraft, such as Boeing's Dreamliner. However, fuel hedges have backfired in the past, and the Dreamliner has only recently been cleared for takeoff after a series of widely publicized battery issues.


Boeing's Dreamliner. Source: Wikimedia Commons.

If oil prices surge from around $113 to a range between $150 to $200 per barrel -- as BP Capital Management's T. Boone Pickens recently warned on CNBC -- major airlines, like Delta Airlines, American Airlines, and United Continental, could struggle to remain profitable.

The Foolish takeaway
In conclusion, investors need to pay attention to the crisis in Iraq, but they shouldn't overreact to the headlines.

Oil could be headed higher, but $150+ per barrel projections are modeled on the worst-case scenario of the Iraqi government collapsing and shutting off its pumps. In the meantime, investors can consider a few conservative investments in oil, gold, and silver ETFs as hedges against the crisis.

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Leo Sun owns shares of Chevron. The Motley Fool recommends Chevron and Halliburton. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers