Investing the Gulf’s
oil profits windfall
Despite many uncertainties, the GCC states will probably be able to finance their
own investment needs and those of the world economy to boot.
Kito de Boer, Diana Farrell, and Susan Lund
Article Surging oil prices have turned member states of the Gulf Cooperation Council (GCC)
at a into financial powerhouses.
McKinsey research indicates that between 2007 and 2020, they will earn $5 trillion to
$9 trillion from exports of crude oil.
Depending on oil prices and levels of domestic investment, 30 to 60 percent of this
windfall could flow into overseas capital markets.
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
(Exhibit 1). 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).1
EX HI B IT 1
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
EX HI B IT 2
Four price scenarios
How much of this capital will be deployed domestically? Since 1993, GCC
investment rates have averaged 20 percent of GDP,2 on par with European and US
levels but almost one-quarter lower than the 24 percent average investment rate of
Brazil, China, India, and Russia combined. If the GCC states continue to increase
their domestic investments by the rate prevailing since 1993—6.1 percent
annually—by 2020, cumulative domestic investment will reach $3.2 trillion, or
$230 billion a year.
Current trends suggest that a growing share of petrodollar wealth will be invested in
local financial markets, to spur regional development, rather than abroad. Already
the GCC states’ wealthy private investors hold an estimated 25 percent of their
portfolios in local financial products, up from 15 percent in 2002. What’s more, a
new generation of GCC leaders has announced plans to boost domestic investment
in hopes of diversifying the region’s economies beyond oil, generating jobs to
employ their swelling populations of young people, and building vibrant new cities.
The preferences of the investors and the ambitions of the leaders could keep
historically high levels of oil money inside the region. Qatar, whose
domestic-investment rate has been 28 percent of GDP since 1993, represents a useful
benchmark, reflecting both efforts to become a regional financial hub and the capital
needs of the natural-gas industry. If the domestic-investment rate for the GCC as a
whole rose to 28 percent of GDP, the region’s states would collectively deploy $4.2
trillion within their borders over the next 14 years, a 7.4 percent a year increase. That
is high but in line with what other fast-growing economies (such as Chile, India, and
Ireland) have sustained over a 15-year period.
Petrodollars not invested locally will spill over into global capital markets. If oil
lingers at around $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 states’ total foreign wealth to $10.5 trillion by 2020.3
Domestic-investment rates as high as Qatar’s, combined with $70-a-barrel oil,
would generate around $2.5 trillion of new funds for GCC investors to deploy in
global capital markets from now until 2020(Exhibit 3). Only a major decline in oil
prices—to less than $30 a barrel, by our calculations—combined with high levels of
domestic investment would make it difficult for the GCC to continue pumping
significant liquidity into global capital markets.
EX HI B IT 3
The GCC’s foreign-investment choices will influence interest rates, liquidity, and
financial markets around the world. And the domestic investments will affect the
region’s urban development, economic diversification, and ability to create jobs.
Fortunately for the citizens of the GCC states and global policy makers, there will
probably be enough petrodollars to satisfy both sets of needs.
About the Authors
Kito de Boer is a director in McKinsey’s Dubai office; Diana Farrell is director of the McKinsey Global Institute,
where Susan Lund is a consultant.
This article is excerpted from a longer report, The Coming Oil Windfall in the Gulf, available online at
mckinsey.com/mgi. The authors wish to thank Chris Figee, Fraser Thompson, and John Turner for their important
contributions to the research.
This is the figure for gross fixed-capital formation, which represents net new domestic investments by enterprises in
fixed-capital assets, such as machinery and buildings. Our data, based on International Monetary Fund (IMF) figures,
came from Global Insight.
This figure assumes a nominal return of 6.5 percent annually on all Gulf Cooperation Council (GCC) foreign assets.
Given a forecast long-run US inflation rate of 2 percent, the real annual return would be 4.4 percent. We applied this
4.4 percent rate to existing foreign assets plus the additional capital each year.
Our model is not dynamic, however, so GDP forecasts until 2020 remain constant, regardless of the investment rate.