The petrodollar puzzle / Economist

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Where do the Gulf states invest their immense wealth?

THERE is no crime involved, but the mystery of the petrodollar billions is worthy of Sir Arthur Conan Doyle. Thanks to high oil prices, the Gulf states' coffers have been bulging. From 2002-06, the six countries of the Gulf Co-operation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) earned about $1.5 trillion from oil exports, twice as much as they made during the preceding five years. Around $1 trillion of that money was spent on imports. The rest—a cumulative current-account surplus of $542 billion—went abroad. But where?
The answer is a matter of avid curiosity, particularly among hedge funds that take big bets on international asset prices. Along with China, the Gulf states are the thrifty counterparts to America's gaping saving shortfall. A shift in their appetite for dollar assets could send the greenback tumbling and push up American interest rates. Hedge-fund managers try to track the flow of petrodollars believing that they are likely to be more volatile than other sources of global liquidity, such as Asian reserves, and are less likely to sit quietly in American Treasuries. They may also be super-charged with leverage through investments made in hedge funds and private-equity firms.

It is an intriguing guessing game. The Gulf countries themselves provide virtually no information, so any estimates must be pieced together from foreign sources. ....

These sources show some $260 billion of capital flows from Gulf states over the past five years, or about 48% of the group's cumulative surplus. This half-picture points to several trends. Gulf investors have become less keen on bank deposits; they are big buyers of American shares and government bonds. And, increasingly, they are direct buyers of foreign companies, particularly European ones

To find the remaining $280 billion, the IIF resorts to educated guesswork. It believes a large chunk is likely to be invested in America. The Treasury's figures do not include bonds or shares bought through a foreign intermediary, such as a London-based investment bank. They therefore understate the Gulf states' holdings, perhaps by as much as $100 billion over the past five years, the IIF conjectures. Some of the surplus is staying close to home in the fast-growing market for sukuk, debt-like instruments permitted under Islamic law, which does not allow the payment of interest. Some $21 billion in sukuk was issued in 2006, up 46% from the year before.

The IIF guesses that some $100 billion, or 20% of the five-year surplus, went to Europe (see chart), buying bonds and shares as well as firms and property. Another $60 billion may have gone to Asia, where Arab oil exporters are pouring money into infrastructure projects as well as buying property and firms.