Wael

DUBAI CRISIS

Most of us have heard that Dubai World is asking for a six month delay in paying back its debt. The debt was supposedly backed by the Dubai government, so Standard & Poor's considers this a default of the Dubai government.

It is a little early to see how the Dubai situation will play out, but it seems to me that there is a significant chance that the Dubai situation will mark the beginning of the next leg down in the downward recessionary spiral and world debt unwind. Oil prices are likely to drop, so few are likely to notice that oil ultimately plays a major role in the continuing debacle

The Dubai situation is complicated, which is part of the reason why the restructuring of Dubai World's debt took the world by surprise. Dubai World, the conglomerate behind a huge number of commercial and residential buildings, is the one whose debt is being restructured. The amount of the restructured debt for Dubai World is only about $60 billion, so by itself, is insignificant compared to the size of the world economy. The government of Dubai backs the Dubai World debt. If one includes the government of Dubai, total debts are about $80 billion, which is still not a huge amount compared to world assets.

Dubai doesn't have much oil. It also doesn't have much water or much arable land either. It is a major financial center, and would like to expand in that role. But without a growing world oil supply (or at least growing Middle-East oil supply), it is difficult to see how continuing growth might happen. Dubai's property values have dropped in the past year and vacancies are a significant issue.

If one knows about peak oil, it is pretty easy to see where Dubai World is headed, over not too long a timeframe. The energy intense plan it has put together is not sustainable for very long. Except for financial services, Dubai does not have much to sell. Financial services generally depend on growth, and in particular growth in debt, but this does not seem really...