The view from the 23rd floor of the Divan, Erbil’s newest five-star hotel, which opens early next year, provides the perfect vantage point from which to survey the construction boom that is gripping the capital of Kurdistan, northern Iraq’s semi-autonomous region.

In blocks immediately surrounding the Divan, some of the world’s leading international hotel groups are busy erecting new towers, including the Marriott Group and Kempinski.

Next to the hotels are two residential blocks, the Italian Village and the English Village, where expatriates – most of them working in the oil industry and also for Turkish companies – and wealthy locals live in neat, almost identical two-storey houses.

Cem Saffari, business development manager at the Divan who has been in Kurdistan since September, says there are not “enough five-star hotel rooms” available to meet demand. The room shortage is one of the most striking examples of the oil boom.

The economy of the small territory, sandwiched between the rest of Iraq to the south, Turkey to the north, Iran to the east and Syria to the west is growing so fast – local officials venture a 12 per cent year-on-year rise – that it is straining the infrastructure.

Barham Salih, prime minister of the Kurdistan Regional Government (KRG), says that per capita income has risen from $375 in 2002, the year before the US-led invasion, to an estimated $5,500 in 2011. The region has seen a big improvement in living conditions, observers say.

Electricity, for example, runs 22 hours a day; in the rest of Iraq, and particularly in the south, shortages are so acute that most cities only receive four hours a day. The city has also opened an airport, with flights to European cities such as Vienna and Frankfurt, daily services to Istanbul, and links to Dubai and Amman, among others. Yet, the economic boom has been uneven. Health services, for example, cannot keep pace with people’s needs and truck traffic clogs the roads.

Mr Salih told a recent energy conference in Erbil that he is planning to tackle some of those problems with a huge expansion of the budget next year. Government expenditure is set to jump 30 per cent to $13bn, up from $10bn this year. Back in 2002, before the US-led invasion, the region’s embryonic government had a budget of just $100m.

Kurdistan produces about 175,000 barrels a day of oil currently, but only exports about 100,000 b/d. Oil export revenues do not go directly to the region, but to the federal government’s treasury. Since 2004, the regional government has received about 17 per cent of the federal budget of Iraq, although Baghdad deducts “administrative costs” from that amount.

As oil prices surge above $100 a barrel and the country’s overall production – from the south and from Kurdistan – increases, the region’s budget has ballooned. The International Energy Agency, the western countries’ oil watchdog, estimates Iraq’s oil production has recovered to the prewar level, reaching 2.8m barrels a day, up from 2.5m b/d in 2009 and less than 2.0m b/d in 2006.

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The budgetary expansion looks likely to continue, as both Baghdad and Erbil plan a big increase in oil production.

Kurdistan itself is aiming to boost oil output from 175,000 b/d currently to about 1m b/d by 2015. Although oil executives say the target is ambitious and may take a couple more years to achieve, it would transform Iraqi Kurdistan into one of the leading oil producers in the world, on par with Opec cartel members such as Qatar and Ecuador.

In the meantime, Baghdad is aiming to boost production in the oil-rich south of the country to 12m b/d by 2017 with the help of international oil companies such as BP, Royal Dutch Shell and ExxonMobil, although analysts believe a target of about 6m b/d by the same date is more realistic.

The proposed rapid increase in production means the oil boom should continue. But observers worry that Kurdistan, like many other countries rich in natural resources, could fall victim to the oil curse.

Erbil exhibits worrying signs already: Turkish exports, in particular, are flooding the market as a strong currency, sustained by oil revenues, encourages overseas buying. Costs and salaries are also increasing rapidly. So too, therefore, is inflation.

Oil executives say that a local qualified employee with three years’ experience could take home about $2,500 a month, up more than 50 per cent from five years ago. Housing costs, particularly for expatriates, have doubled also over the past five years. Small villas are rented for between $3,500 and $6,000 a month.

Besides oil, security is the other great economic engine of Kurdistan. While terror attacks in the Shia-Sunni conflict continue to be a daily routine in the rest of Iraq, the northern region, with its ethnically homogenous population and increased prosperity, has seen little violence over the past few years.

Mr Saffari, who previously worked in London where his family still resides, says: “I was worried because of the bombings and violence in Iraq, but in Erbil I feel safer than in London. When I tell my family they think I am joking.”