The coming oil windfall in the Gulf

By Kito de Boer, Diana Farrell, Chris Figee, Susan Lund, Fraser Thompson, John Turner

At an oil price of $70 a barrel, the six nations of the Gulf Cooperation Council would earn a cumulative $6.2 trillion by 2020. Decisions by Gulf leaders on how to use this wealth will have global repercussions for decades.

In any plausible oil-price scenario, the wealth of the nations of the Gulf Cooperation Council (GCC) will continue to grow significantly between now and 2020. At an oil price of $70 a barrel, the six nations of the GCC would earn a cumulative $6.2 trillion by 2020, or more than triple the amount they earned from 1993 through 2006. Decisions by Gulf leaders on how to use this wealth will have global repercussions for decades.

MGI research seeks to inform the discussion about the GCC countries’ impact on global capital markets by laying out the potential scale of the windfall, shedding light on the diversity and investment strategies of Gulf players, and noting some of the opportunities, challenges, and policy issues raised by the new oil boom.

MGI estimates that the total value of the Gulf states’ foreign assets reached $1.9 trillion by the end of 2006—more than double their level in 2003 and nearly equal to the GDP of India and Brazil combined or the market value of the top ten Fortune 500 companies.

In 2006, the GCC states together had net capital outflows of $202 billion, joining China to become the world’s largest sources of surplus capital.

Even with vast amounts of funds to invest, there are limits to how fast the Gulf will be able to effectively increase domestic investment and create new jobs. As a lower estimate, the GCC nations could continue to grow domestic investments by the same rates seen since 1993—6.1 percent annually. This would imply cumulative investments of $3.2 trillion by 2020, or $230 billion annually.

The petrodollars not invested locally will spill over into global capital markets. In MGI’s base case, the GCC would have $3.5 trillion of new funds to invest in global capital markets through 2020. Including asset appreciation, the added investment would raise their total foreign wealth to $8.3 trillion. The resulting nest egg would amount to roughly $270,000 for every GCC citizen at that time.

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