An electric crude oil pumping unit stands on a hill overlooking Williston, North Dakota

As the US produces more oil, its reliance on the Middle East will diminish. Photo: Getty Images

The share and bond markets should be less vulnerable to the outbreak of violence and political unrest in the Middle East than they have been in the past.

This depends on how the Iraq crisis develops, of course; on whether Iran becomes militarily involved, for example, and on the Western world's response.

But while sharemarkets were down and oil and gold were up on Thursday and Friday - betraying investor tension - the claim that, for the West, geopolitics in the Middle East are all about oil is not as easy to make as it used to be.

In 2003, when the United States invaded Iraq, the Organisation of Petroleum Exporting Countries (OPEC) was the source of 40 per cent of global oil production. OECD nations consumed 60.5 per cent of the oil that the world pumped.

In 2012, OPEC was still the biggest producer block, accounting for 43 per cent of world production. But the OECD's share of global oil consumption was down to 50.2 per cent - the lowest level on record.

The global financial meltdown that began in 2007, the growth slowdown it produced, and policies that aim to rein in carbon emissions have limited growth in Western world demand and made the West less oil-intensive.

In 2003, the International Energy Agency predicted, for example, that by 2035, the world would be consuming 120 million barrels of oil a day, up from about 77 million in 2003. In January this year, the BP group's annual energy outlook said oil demand would rise more slowly - to 109 million barrels a day by 2035.

''All the net demand growth is expected to come from outside the OECD - demand growth from China, India and the Middle East will together account for almost all of it,'' BP said.

Energy use in the advanced economies of North America, Europe and Asia was growing very slowly, it added, and would actually be declining towards the end of the forecast period.

There's also a supply-side change occurring. Since the 2003 Iraq invasion, new technology has opened up deep-water offshore oil and gasfields, and tapped oil and gas contained in tight shale formations on shore. The technology is being rolled out globally, and has already transformed production in the US.

US oil production has risen by 39 per cent since 2011, as Gulf of Mexico production rises and companies including Australia's BHP Billiton tap shale oilfields that are spread around the country, in states such as Texas, Louisiana, Pennsylvania, Colorado, Wyoming and Utah.

The surge in US oil and gas production was driven by relatively small companies and was not foreseen by politicians. US President Barack Obama said in 2011, for example, the US should try to cut its oil-import bill by a third in 14 years. It took three years to get that job done.

The US oil and gas production boom is transforming the politics of oil in the world's most powerful country.

A bipartisan political consensus that US oil and gas should be reserved for the US market has, for example, broken down, and the US is on the way to becoming a major oil and gas exporter.

In its latest outlook, BP predicts that America's oil and gas export revenue will outweigh its oil and gas import spending from 2018 onwards.

None of this means markets won't be hit if the situation in the Middle East continues to deteriorate. Oil supplies are not the only concern for the West and its markets as the assault by fundamentalists in Iraq intensifies.

Developing nations, including China, and developed ones, such as Japan, also rely heavily on oil imports.

For the US in particular, however, Middle Eastern oil supplies have less strategic importance than they did a decade ago, and they will become less important in years to come as shale and other unconventional oil sources are developed.

America's rapid move towards self-sufficiency will be a factor as it weighs the pros and cons of action after its earlier unsuccessful Iraq excursions.

A SAFE bond bet

An unexpected surge of buying in the bond markets has driven yields and risk premiums sharply lower worldwide this year.

Analysts have been struggling to explain why investors have been prepared to accept lower yields to get set, and the Middle East situation is a potential catalyst for a ''risk-on'' correction in bonds and shares, as investors see higher risk and knock prices down to lock in higher yields to compensate for them.

Another more bullish theory, however, is that this year's bond market rally was fed by huge buying by the State Administration of Foreign Exchange (SAFE), the Chinese central bank agency that controls capital inflows and outflows in China and the foreign reserves they generate.

Zhu Changhong, a former gun bond trader at the giant US bond fund manager Pimco, resigned as chief investment officer of SAFE in January.

He joined SAFE in June 2010, when China had about 45 per cent of its foreign reserves - about $US1.1 trillion ($1.17 trillion) - invested in US government bonds. US bonds were down to about 35 per cent of China's foreign reserves in September last year ahead of Zhu Changhong's departure, and SAFE would need to buy US bonds worth more than $US360 billion to recreate the old 45 per cent weighting.

Has SAFE been buying? Not clear: SAFE is a black box. For whatever reason, the markets were very confident going into the Iraq crisis, however. That could be either an asset or a liability if, as expected, the Iraq crisis expands.

mmaiden@fairfaxmedia.com.au