Gulf to Bank $1 Billion a day from Oil Boom

Robert Hamilton
For Al-Shorfa.com
2008-07-21

Traders churn around in the oil futures pit of the New York Mercantile Exchange July 15, 2008 in New York City. (Photo by Chris Hondros/Getty Images)

The six Persian Gulf states are set to earn an accumulated export surplus of $1 billion [USD] a day if oil prices remain above $135 a barrel, according to a new report by global investment banking giant Merrill Lynch.

Their surplus earnings will top $360 billion for 2008, according to the report, while analysts estimate that a $10 increase in the oil price could boost Gulf Cooperation Council (GCC) export revenues by $55 billion a year.

The bank estimates that in the short to medium term, the Gulf region will have abundant liquidity and will continue to offer a safe haven for investments as their surplus from oil windfall mounts.

The GCC nations – Saudi Arabia, Qatar, Kuwait, Bahrain, Oman and the U.A.E. – are home to 40 percent of the world’s proven oil reserves and 25 percent of its natural gas reserves. The region's non-oil growth currently accounts for 80 percent of GDP growth and 70 percent of the $2 trillion investments that target improvements in infrastructure across the region.

Last week, a report from the McKinsey Global Institute (MGI) said that the GCC countries are set to collectively deploy $4.2 trillion within their own borders over the next 14 years as their focus increasingly shifts from overseas to domestic investments.

Signaling a strategic shift in the GCC's global investment pattern, the new trend suggests that a growing share of the enormous oil wealth will be invested in local financial markets to spur regional development.

“If the GCC states continue to increase their domestic investments by the rate prevailing since 1993 — 6.1 percent annually — by 2020, their cumulative domestic investment will reach $3.2 trillion, or $230 billion a year,” the MGI report says. “However, if the domestic-investment rate for the GCC rises to 28 percent of the GDP in line with what other fast-growing economies have sustained over a 15-year period, the region’s oil exporting countries would collectively deploy $4.2 trillion within their borders over the next 14 years — an increase of 7.4 percent.”

Since 1993, GCC investment rates have averaged 20 percent of the GDP, on par with European and U.S. levels, but almost one-quarter lower than the 24 percent average investment rate of the BRIC nations - Brazil, Russia, India and China - combined.

However, oil revenues, which are not invested locally, will spill over into global capital markets. The research said, “If oil lingers at above $100 a barrel and domestic investment stays at historic levels, the GCC would send $5.1 trillion in new funds into world markets over the next 14 years, boosting these countries’ total foreign wealth to $10.5 trillion by 2020.”

Dubai-based investment analysts have cautioned that the growing trend towards local investments and a new GCC foreign investment strategy are likely to affect interest rates, liquidity and financial markets around the world.

The MGI research estimates that exports of crude oil will earn the Gulf states $5 trillion to $9 trillion from 2007 to 2020, and that they will invest 30 to 60 percent of their oil windfall abroad.

“Oil prices will determine the volume of wealth the GCC states will have available to invest,” the report said. “At current prices, floating above $100 a barrel, they would earn more than $9 trillion in 12 years.”

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