JEDDAH, 17 October 2007 — Once again oil proved its importance in shaping global economy. Its impact on development is unquestioned. The demand for this precious commodity both from the developed and developing countries remains unabated, and of late, surged to record levels as global industrial and commercial expansion appears to be in full swing particulary in emerging markets.
Against this background, prices of black gold have quadrupled compounded by mounting geopolitical concerns and the continued depreciation of the dollar.
As a result, oil producers, especially the big ones, are the immediate beneficiaries with their coffers awash with cash coming from oil. The continued upward trend in oil prices becomes a windfall for oil exporting countries.
In a report titled “The New Power Brokers: How Oil, Asia, Hedge Funds and Private Equity are Shaping Global Capital Markets”, McKinsey & Company said the majority of revenues generated from oil and petroleum products have been recycled into global financial markets, “making petrodollar investors increasingly powerful players.”
In 2006, oil exporting nations became the largest source of net global capital flows in the world, surpassing Asia for the first time since the 1970s, it said.
“We estimate that petrodollar investors — including both government and private have between $3.4 trillion and $3.8 trillion in foreign financial assets, making them the largest of the four new power brokers.”
The report said investors from oil-exporting nations collectively own between $3.4 trillion and $3.8 trillion in foreign financial assets, measured at the end of 2006.
Most oil exporters have set up state-owned investment funds, often called sovereign wealth funds, to invest oil surpluses in global financial assets. Unlike central bank reserves, these funds have diversified portfolios that range across equity, fixed income, real estate, bank deposits, and alternative investments, such as hedge funds and private equity.
Among the largest sovereign wealth fund among oil exporters is the Abu Dhabi lnvestment Authority (ADIA), which reportedly has total assets of up to $875 billion, the report noted.
Increasingly, oil exporters channel some of their wealth into smaller, more targeted investment funds, which invest directly into domestic and foreign corporate assets, shunning the portfolio investment approach of sovereign wealth funds.
Many of these funds operate like private equity funds that actively buy and manage companies, either alone or with consortia of other investors. These funds include Dubai International Capital (DIC), lstithmar and Mubadala, among others.
McKinsey & Company also said that private wealth is highly concentrated in almost all petrodollar countries. These investors place a large portion of their wealth abroad, often using financial intermediaries in London, Switzerland, and other financial hubs, and most have highly diversified asset allocation.
“They also have some unique investment preferences, with a penchant for equity and alternative investments,” it said. Some state-owned companies in oil-exporting nations receive government funding directly or indirectly and then invest in companies abroad, it further said.
In general, however, petrodollar portfolios place more emphasis on equity and equity-like investments than do other investors. Aggregating across different petrodollar investors, the report noted that 46 percent of assets overall — by far the largest share — is allocated to equities, and just 42 percent to low-risk, low-return assets (fixed income and bank deposits). The remaining 12 percent of the total allocation is in high-risk, high-return investments (foreign direct investment (FDI), alternative assets, and real estate.
Petrodollars have also added liquidity to international equity markets.
McKinsey & Company’s report estimated that the “annual flow of petrodollars into global equity markets is around $200 billion, about $2 trillion — or 4 percent — of global equity market capitalization.”
However, according to research by the Economist Intelligence Unit, real estate values in developed countries have increased by $30 trillion since 2000, reaching $70 trillion in 2005 and far outstrip ping GDP growth over the same period.
This rise reflects not only the preference of petrodollar investors for putting money into global real estate but also the additional home-equity loans and larger mortgages that low interest rates and risk spreads have enabled.
“Indeed, petrodollars have contributed to an increase in global leverage in many forms,” the report added.
