With the start of the twenty-first century, all three factors in our story – financial markets, energy economics, and Middle-East geopolitics – have become major players on the global scene. In this chapter, we study how contagion and spillovers have grown substantially between different financial markets, markets for different sources of energy, and previously region-specific geopolitical conflicts. In the process, as each of the three factors has become more globalized, the interactions among the three factors – which constitute the core focus of this book – have also grown in importance, leading to what we have called the globalized curse of black gold.

We begin by reviewing some of the major developments that have led to this globalization of Middle-East dynamics. The first development has been the rise in structured finance, which facilitated the creation of derivative financial vehicles that have, in turn, allowed investment and fund-flow patterns that were not previously possible. The second closely related development has been the increasingly important role of hedge funds and sovereign wealth funds. The former are unregulated market participants that have been able to use derivative securities to play the role previously reserved for highly regulated banks, and the latter a new gargantuan phenomenon which continues to mystify much of the financial world.

Concurrent with those novel developments in the financial world, improvements in information technology have amplified the role, steadily increasing in importance, of developing countries both as sources of capital and as homes for inviting “emerging markets” for investment opportunities.