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

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 (Exhibit 2).

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 2020⁴ (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.

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.