Investing the Gulf's oil profits windfall

By Kito de Boer, Diana Farrell, and Susan Lund

Despite many uncertainties, the GCC states will probably be able to finance their own investment needs and those of the world economy to boot.

Surging oil prices have turned member states of the Gulf Cooperation Council (GCC)—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)—into financial powerhouses, and they’re just getting started. Their companies, sovereign wealth funds, and wealthy individuals could invest trillions of dollars beyond their borders by the end of the next decade, according to new research from the McKinsey Global Institute (MGI).

The GCC states already hold roughly $2 trillion in foreign assets, maintain large stakes in companies from Sony to Nasdaq, and have purchased, outright, companies like GE Plastics and Barneys New York. MGI research estimates that exports of crude oil will earn these states $5 trillion to $9 trillion from 2007 to 2020 and that they will invest 30 to 60 percent of their oil windfall abroad. The price of oil and the apparently increasing amounts that the GCC states invest domestically will determine how much of this money flows overseas.

MGI’s conclusions rest on a combination of interviews (shedding light on the GCC’s shifting economic goals and asset allocation strategies) and economic modeling (which employed a national-accounting approach to model capital outflows). Using economic forecasts from institutions such as the International Monetary Fund (IMF) and the experience of McKinsey’s industry experts, we calculated the GCC economies’ total expected revenues from oil and nonoil sources alike. We then developed a range of plausible domestic-investment levels and derived capital outflows as the difference between total revenues and domestic investment. This approach allowed us to forecast how oil prices, domestic investment, and capital flows will interact.

Ultimately, of course, it is oil prices that will determine the volume of wealth the GCC states will have available to invest. Even at $50 a barrel, they would earn a cumulative $4.7 trillion by 2020—2.5 times their earnings over the past 14 years. At current prices, floating around $100 a barrel, they would earn $8.8 trillion by 2020.

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