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Trading paper wealth for real assets

The spending of the oil wealth will suck in imports, provide a medium-term economic boom and might swiftly and radically realign the global order of which countries boast what combination of real wealth, jobs and durable economic activity.

Bankers at Citigroup, working the numbers on the global oil industry, suggest that at a price of $75 per barrel it is a $3.5 trillion-a-year market throwing off annual profits of $1.8 trillion. For comparison, if you treated the $11 trillion economy of the US as a business, it would be producing annual net income of $1.5 trillion. So, at these price levels, the global oil business is a more powerful entity than the world’s biggest national economy.

The resulting flow of financial wealth, largely from developed countries to the newly enriched emerging markets, is vast, unprecedented and opaque, and it is transforming the world at a speed and in ways that are still not well understood.

Last month, the Institute of International Finance forecast that the nominal GDP of the Gulf Cooperation Council countries would grow by 19% in 2006, following a cumulative expansion of 75% over the past three years that has lifted GDP per capita from $11,000 to $17,000.

The region’s oil profits have been recycled into financial markets, notably US and European government bonds, as well as riskier private financial instruments, at a furious pace. In the past six years, the GCC has accumulated $400 billion in foreign assets and is set to export another $450 billion in capital during 2006 and 2007.

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