Published: February 4, 2009 at 5:14 PM
I chose my words carefully: "oil-enriched." If Dubai's wealth was not coming from the sale of oil, it certainly was coming from providing financial services to those whose wealth, in large part, derived from the sale of oil. It might be secondary oil wealth, but it is undoubtedly oil wealth.
Second, what is happening in the world's financial markets now is not some unfortunate random downtown that just happened to scuttle grand plans in Dubai. The world's financial melt-down was the inevitable, and easily foreseen, result of the financial bubble that created these plans.
Let's examine the Dubai market, using Las Vegas as comparison. Both were large tourist developments created in isolated desert communities. But Dubai faces obstacles that Vegas did not. First, there is no Los Angeles within driving distance to provide a core local market. Second, migration within the immediate community is severely restricted, and generally not open to families or desirable for outsiders seeking long-term relocation.
So there are just two options to populate the Dubai market: the small market model, which would be limited to highly wealthy individuals, primarily those in the Middle East whose fortunes derive from the sale of oil. The large market model is middle-class to wealthy Europeans and South Asians, whose ability to fly to Dubai depends upon cheap transportation (i.e. cheap oil) and favorable credit and exchange rates.
We will not again in our lifetimes see credit as easily available as we have seen in the past 10 years. And if long-haul transportation costs remain low enough to make Dubai a viable destination for Europeans and Asians, capitalization for Dubai's projects will become a problem, given the lower oil revenues (and corresponding oil-driven investments) and the tighter restrictions on credit.
If oil prices rise, the Europeans and Asians are priced out of the market, so Dubai would be building its projects and money-losing playthings for the local wealthy. (Put the Ferrari project in this camp.)
Simply put, the numbers don't work for the 2007 vision of Dubai (as they don't work for the 2007 vision of just about everything in the world). Whatever is to be completed in Dubai -- and remain open for a decade or more beyond -- will have to be developed within one of the two models that I've described.