Dubai: More Bubble or More Boom? Time Will Quickly Tell
Jul 23rd, 2008 | By Martin Hutchinson | Category: Real Estate InvestmentsThe other potential black cloud looming over the Dubai economy is that of oil prices, should $130 – $140 per barrel oil turn out to be a short-term speculative price spike.
With the Bush Administration pushing for offshore drilling and the world automobile industry devastated by consumer tastes that quickly shifted to small cars and trucks, increased supplies and decreased consumption could push oil prices down to a more reasonable level.
Assuming OPEC doesn’t intercede and act to keep prices high, the right confluence of factors could potentially push oil prices back down under the Century Mark. And in a perfect world, with the right confluence of factors, oil could end up below $100 per barrel, or even as low as the $60-$80 range. And while that price level would still be well above the $10-$15 per barrel prevalent before 2002, it is far below oil’s current levels.
The Middle East in general has predicated their future plans on the oil bonanza continuing in full flow for the indefinite future. Even though $60-80 oil would provide ample revenue for their citizens to enjoy an excellent living standard, their economies are not properly set up to adjust to such a lower revenue flow. If oil prices were to fall, the inevitable effect would be tighter money as interest rates return to normal levels, exacerbated by an acute cash shortage.
Dubai is looking to diversify itself away from the petro-gusher, which is one reason it is trying to position itself as a global boom intermediary, benefiting from tourism and establishing itself as a new residential destination for the world’s uber-rich. It also aims to utilize its airport and aerospace ventures to fuel its real estate and global commerce aspirations.
But a key question remains: Is it still tied in so tightly to the Middle East “black gold” bonanza that it will suffer in kind should energy prices hit a deflationary downdraft?
The next few years will be telling. If its global growth aspirations get a needed lift, the tiny Gulf nation could become more than just a well-recognized name on a map; it could end up as a key stopping-off point for business executives traveling from one side of the world to the other, might one day even evolve into a commercial spaceport, and will stand as an example of a country that was able to engineer an economic makeover of massive proportions.
But should oil prices crater, Dubai’s aerospace venture fail to attain take-off speed, and its vision as a tourism and residential mecca of the future turn out to be ill-conceived as I fear, the opposite extreme is possible: With a construction bubble more inflated than the 2006 Florida condo market and a monetary policy looser than the one being operated by U.S. Federal Reserve Chairman Ben S. Bernanke, Dubai could shortly resemble a jungle of half-completed skyscrapers, with 10% occupancy rates and bankrupt landlords. Its landing would be painful, and, potentially, not long delayed. It’s not an investment for the risk averse.
Source: Dubai: More Bubble or More Boom? Time Will Quickly Tell
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Martin O. Hutchinson is a Contributing Editor to both the Money Map Report and Money Morning. An investment banker with more than 25 years experience, Hutchinson has worked on both Wall Street and Fleet Street and is a leading expert on the international financial markets.
Hutchinson earned his undergraduate degree in mathematics from Cambridge University, and an MBA from Harvard University. He lives near Washington, D.C.
