Ever since the Jasmine Revolution broke out in Tunisia in December, ultimately forcing dictator Zine El Abidine Ben Ali to flee the country, democratic fervor has swept across the Middle East and North Africa (MENA). Shortly after Ben Ali’s unceremonious departure from the country, Egyptian President Hosni Mubarak was forced to step down amid riots on the street. At present, unrest has spread from Bahrain to Oman and Libya and a number of governments in the MENA region are scrambling to quell the turmoil.

Generations in the region have lived under repressive regimes that have suppressed the media, curtailed freedom of speech and taken extreme measures to maintain power. The region was already a tinderbox waiting for a spark.

Most commentators have identified food price inflation as igniting the riots–a recent United Nations report found food price inflation to be at its highest-ever levels. Much of the region’s food is imported and these already-high costs account for a large percentage of household income. This makes consumers highly sensitive to any increase in the cost of food.

Soaring food prices, coupled with discontent with the political system, become more than the populace could bear, particularly the region’s youth, who face widespread unemployment.

These elevated unemployment levels are particularly troubling given that the educational attainment rate in the MENA region is among the highest in the world. Most of the MENA countries have made significant investments to build quality educational institutions over the past half century. The countries also provide generous education subsidies for citizens. A large segment of the region’s population holds bachelor’s degrees and many have attained master’s degrees.

It’s turned out to be an embarrassment of riches. These authoritarian regimes have scared off foreign investors, save for the Western energy firms eager to develop the region’s energy resources. Consequently, a workforce of well-educated youths has had to accept menial jobs as an alternative to unemployment.

Many Western pro-democracy advocates have welcomed the uprisings. But global markets have been less sanguine.

It would be reassuring to dismiss the unrest in the MENA region as a purely localized concern. But the region is home to roughly 6 percent of the world’s population, 60 percent of known oil reserves and 45 percent of natural gas reserves. Consequently, the turmoil in the region may have serious consequences for Western investors.

Potential Outcomes

Chief among worries is that fundamentalist Islamic governments could rise to power in the region. These governments may be unfriendly to Western business and could even transform their countries into incubators for terrorism. But this secnario doesn’t appear likely.

Tunisia currently lacks clear leadership as various parties jockey for position. But developments thus far have been largely positive. In the immediate aftermath of Ben Ali’s ouster, the parliament passed a bill granting emergency powers to interim president Fouad Mebazaa. This allowed him to ratify international human rights treaties without parliamentary approval. It also legalized all formerly banned political parties–including a moderate Islamist party.

The situation in Tunisia remains extremely fluid. But it’s an encouraging sign that the new government moved quickly to respect human rights and democracy. Although the Muslim Brotherhood–an organization that advocates for theocracy–favors installing an Islamist government in Tunisia, the movement doesn’t appear to be gaining traction.

Egypt is home to much of the Muslim Brotherhood’s power base and Mubarak had long justified repressive measures to keep the organization in check. But Egypt’s army remains in control of the country and all signs point to a continuation of secular governance of the country.

Political risk remains a potent threat to stability in the region. But the odds are against radical groups seizing power. The same youth that unleashed the current chaos appears to want democracy rather than theocracy.

Nevertheless, two wild cards remain in play in the region: Libya and Saudi Arabia.

Instability in Libya is more of a political thorn in the US’ side than a true economic threat. After Libya was designated as a state sponsor of terrorism in 1979, the US enacted a broad set of economic sanctions and embargoes that all but halted trade between the two countries. Relations between the two countries began to normalize in 2004 and diplomatic relations were renewed in 2006. But long-standing tensions between the two countries resulted in minimal bi-lateral trade. Libya is more valuable to the US as an export destination than as a provider of natural resources. Although Libya produces about 2 percent of the global oil supply, very little of that crude finds its way to the US.

But Libya is an important supplier of crude for the European markets. France and Italy rely heavily on Libyan oil, and Italian energy giant Eni (NYSE: E) has extensive operations in the country. Although US military involvement in Libya is unlikely, there’s an outside chance that NATO forces could be deployed to the North African country. Thus far, Saudi Arabia has been able to make up for lost Libyan oil production–though some doubt that Saudi Arabian production has indeed ramped up. Still, oil prices have stabilized and the market doesn’t face supply shortages indicating that, for now, the Saudis can be taken at their word.

Saudi Arabia has also avoided political turmoil. The country is one of the region’s richest, and the royal family has allocated $36 billion in direct payments and aid to the country’s working class, staunching potential widespread riots. Whether that program keeps a lid on social unrest is an open question. But for now the House of Saud has the resources to purchase peace in their country.

The Play

The MENA region will continue to be roiled by riots and unrest in the coming months. But the turmoil will ultimately be resolved and the oil will keep flowing. There are simply too many vested interests in the region to allow for any other outcome. Furthermore, any new governments that come to power will need oil revenue to keep their countries running.

In line with our outlook, we’ve added Market Vectors Gulf States (NYSE: MES) to our Short-Term Opportunities Portfolio.

At 44 percent of investable assets, the fund’s single largest country exposure is to the oil-rich emirate of Kuwait. The emirate hasn’t been immune to instability. On Tuesday, an estimated 1,000 demonstrators rallied to remove the nation’s prime minister and implement democratic reforms. But so far the demonstrations have been peaceful. In addition to Kuwait, the exchange-traded fund (ETF) devotes almost a quarter of its assets to Qatar, 20 percent to the United Arab Emirates, 5 percent to Oman and just over 3 percent to Bahrain.

Like most ETFs focused on the MENA region, the fund has a heavy weighting toward financials. These holdings are extremely sensitive to the domestic political environment and represent an excellent play on regional stabilization. The fund is one of the region’s more liquid offerings with an average bid-ask spread of 0.66 percent–in recent days it has tightened closer to 0.4 percent–reducing costs.

Betting on stabilization in the MENA region, Market Vectors Gulf States is the newest addition to our Short-Term Opportunities Portfolio and rates a buy under 22.