How important is the revenue from oil-producing countries in the worldwide economy? They may not be as big a force in world investment flows as pension funds, but petrodollars are one of the four most influential sources of investment according to a new McKinsey Global Institute study. And they’re increasingly investing that money in foreign real estate and commodities - particularly in Africa and Asia.

The really big investment powers are still pension funds, mutual funds and insurance companies. But their combined assets fell by a fifth from 2007 to 2008, from $75,500bn to $60,000bn. Meanwhile the four groups identified by McKinsey - petrodollars, hedge funds, private equity and Asian governments - only fell slightly from $12,300bn to $12,100bn in that period.

And petrodollar assets are likely to be the highest growing of the four ‘power brokers’:

As revenues have grown, they’ve been spending increasing amounts of money overseas - but they’ve also been spending increasing proportions overseas too - from 25 per cent in 2002 to 57 per cent last year.

And where exactly is it going?

In recent months, managers of several petrodollar sovereign wealth funds have discussed plans to broaden their investment strategies to include more real estate, commodities, and activity in emerging markets. The focus on real estate reflects the current opportunities to snap up many properties at depressed prices. The Abu Dhabi Investment Company, which is owned by the Abu Dhabi Investment Council, stated in April that it plans to launch an international real estate investment fund. The Kuwait Investment Authority reportedly plans to take advantages of opportunities in global real estate and in equities.
In addition to investing in real estate, some oil exporters—particularly in the Middle East, where arable land is in short supply—have stepped up investments in agricultural land for food production and biofuels. For instance, the United Arab Emirates has secured 400,000 hectares of farmland in Sudan, while Saudi Arabia is leasing land in Ethiopia to grow grains. A survey of press reports since 2006 by the International Food Policy Research Institute found eight signed deals involving investors from oil-exporting countries securing farmland in developing countries.20
Some petrodollar investors are interested in commodities investments as a way to secure future supplies of raw materials and as a hedge against the risk of higher global inflation. The executive director of the Qatar Investment Authority, for example, said in March that the fund would turn its focus to commodities—particularly food and energy—in the second half of this year.

The petrodollar countries, in case you’re wondering, are: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates, Algeria, Indonesia, Iran, Libya, Nigeria, Norway, Russia, Syria, Venezuela, and Yemen

Related links:

Qatar fund to target food and energy (FT)
McKinsey report (requires registration)

July 9, 2009 12:47pm in Markets, Oil | Comment