The 17th century saw the Arabian Peninsula experience some tumultuous times. The area that is now Kuwait was occupied by tribes and used for spice trading from India. By the 18th century, most of the local people made a living selling pearls. But as pearl farming developed in Japan during the 1930s, Kuwait became impoverished. In 1899, growing British influence led to Kuwait becoming a British protectorate. Oil transformed Kuwait into one of the richest countries in the Arab peninsula; in 1953 the country became the largest exporter of oil in the Persian Gulf. This massive growth attracted many immigrant laborers who were rarely granted citizenship. Kuwait, having amassed great wealth, was the first of the Persian Gulf-Arab states to declare independence, on June 19, 1961. Iraq challenged this declaration, claiming Kuwait was part of its territory. It threatened to invade Kuwait but was deterred by the British, who flew in troops.

An important period in Kuwait's political, social and economic development was the Souk Al-Manakh stock market crash of 1982. This was a major crash that had widespread consequences and has endured in the public memory even decades later.

After being allied with Iraq during the Iran-Iraq War until its end in 1988 (Kuwait paid Iraq to protect it from what it perceived as a threat posed by Iran), Kuwait was invaded and annexed by Iraq (under Saddam Hussein) on August 2, 1990. Hussein's primary justifications included a charge that Kuwaiti territory was in fact an Iraqi province, and that annexation was retaliation for "economic warfare" Kuwait allegedly had waged through slant drilling into oil supplies on Iraqi territories. Hussein deposed the monarchy after the annexation and installed a new Kuwaiti governor.

Authorized by the UN Security Council, an American-led coalition of 34 nations fought the Persian Gulf War to liberate Kuwait. After six weeks of fierce fighting in early 1991, the coalition forced Iraq to withdraw its troops from Kuwait on February 26, 1991; during retreat, the Iraqi Armed Forces exacted a scorched earth policy by setting fire to Kuwaiti oil wells. The fires took more than nine months to fully extinguish, and the cost of repairs to oil infrastructure exceeded $5 billion. Certain buildings and infrastructural facilities (including Kuwait International Airport) also were severely damaged during the war. Kuwait remains under the governance of the Emir, Sabah Al-Ahmad Al-Jabir Al-Sabah (since 29 January 2006) as an independent state and is of strategic importance to the United States.