The Gulf Co-operation Council is an organisation of enormous global significance and over the coming years will enter a period of change that could have profound implications for the Middle East and the rest of the world. The countries that make up the GCC - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates - are sitting on no less than 40% of the world's known oil reserves. Combined with the other Persian Gulf countries of Iran and Iraq, the GCC also accounts for 30% of the world's crude oil exports, rising to an estimated 38% share by 2025.
Such is the depth of this energy footprint that many eyes are following the GCC's steady path towards greater economic integration, leading ultimately to monetary union in 2010. Since its formation in 1981, the GCC has moved towards a unified bloc, including a customs union established in 2003 and the freedom of GCC citizens to travel, work and own property in all member states.
The process towards monetary union, formalised in a timetable last year, has been smoothed by an exceptional period of economic expansion and a booming commercial sector. Over the past three years, the size of the GCC economy has grown by 74% to about $610 billion, double the level of 2000 and making it the world's 17th largest economy, ranked between Belgium and the Netherlands. According to Standard Chartered Bank, growth in the GCC averaged 7.3% in real terms in 2005, but with nominal growth rates (discounting the effects of inflation) averaging 30%, growth on the ground feels even stronger.
This boom has been driven largely by high oil prices: oil and gas exports reached a record level of $330 billion in 2005. In a recent study, the Washington-based Institute for International Finance (IIF) noted that by 2007 the GCC's total export earnings would reach $544 billion, exceeding the combined total for Brazil, India, Poland and Turkey. The GCC governments are overflowing with cash - a record petrodollar surplus stood at $167 billion in 2005 and the IIF forecasts that this will jump to $227 billion in 2006, falling only fractionally in 2007.
The surplus has allowed the GCC's banking system to build a level of foreign assets that, says the IIF, is second only to China. It has also helped to fuel an investment and consumption boom, reducing the region's dependence on oil and gas revenues. Foreign and domestic investment is pouring into new projects in the Gulf at an astonishing pace and has helped the GCC countries modernise their infrastructure, create employment and improve social indicators.
According to a report by the Economist Intelligence Unit (EIU) and the Columbia Programme on International Investment (CPII), foreign direct investment in most GCC countries is rising sharply and will continue to do so over the next four years. Saudi Arabia, which attracted just $900 million in FDI in 2005, is expected to see this figure double by 2010, driven by the kingdom opening up key sectors to outside investment, such as telecommunications and power. Kuwait, now emerging from more than a decade of uncertainty following the first Gulf War, is also becoming a magnet for more FDI - from $100 million in 2005 to an anticipated $500 million by 2010. Flows to Qatar and Bahrain are also expected to climb.
However, perhaps reflecting the increased economic maturity of some parts of the GCC on the world stage, FDI into the UAE, the largest destination for investment in the region, is beginning to taper off. By 2010, the EIU and CPII expect FDI into the UAE to fall to $7.5 billion - roughly half the levels of 2005 and 2006.
According to the IIF, infrastructure and energy projects valued at more than $1 trillion are either planned or underway in GCC countries. This huge number of new projects is vital for the GCC as it tries to reduce its dependence on hydrocarbon earnings. The IIF says the non-hydrocarbon sector currently contributes 53% of the GCC's GDP from a high of 76% in 1998, due to the surging oil prices. Being over-dependent on oil also makes the region more vulnerable to sudden market shifts.
The most mind-boggling scale of new investment is in Dubai, the world's fastest growing city. An estimated $100 billion worth of construction projects is either underway or planned in the city. To put this in context, the World Bank judges that the reconstruction of Iraq will cost half that amount. An underwater hotel and a Disneyland-style amusement park are just two of the projects; and what is expected to be the tallest building in the world at 800m, Burj Dubai, is also under construction, costing $800 million.
Catering for a surge in the GCC's population - 35 million in 2005, double the level 20 years ago - much of the new construction activity is focused on retail, tapping into the GCC's consumer boom and a retail market worth an estimated $50 billion a year. Dubai is fast becoming home to some of the world's biggest malls, turning the city into the shopping centre of the East. Dubai Festival City, a 1,600-acre town alongside the city's famous Creek, will have more than 200,000 sq m of retail space and is the largest privately funded project in Dubai.
For large foreign companies looking to invest in the region, the creation of a single currency can only be good news. The process should be much smoother and less controversial than in Europe, thanks to the homogenous nature of the GCC countries in terms of culture, economic structure and social issues. There has also been a remarkable level of exchange rate stability against the US dollar in all GCC countries.
As more overseas money flows into the region and the benefits of economic integration are felt, the key question will be whether the GCC boom can be sustained without being fuelled by oil and gas alone. As long as money from the oil boom keeps pouring in, the GCC countries can build for the future. Dubai is leading the way in putting the building blocks in place and other states are following its lead. In all, the signs are that a unified and economically powerful GCC looks set to play an increasingly important role on the world stage.