Dubai, with its modest oil resources, long ago realised it had to become a post-oil economy.
The sharp drop in oil prices from the middle of last year highlights the wisdom of this decision. But how insulated is the emirate’s economy from oil? And what, if anything, can its Arabian Gulf neighbours learn from it?
Speakers at a Bloomberg conference, who gathered recently to discuss the impact of falling oil prices on Dubai, were quite sanguine. With falling output since the early 1990s and rapid expansion of other sectors such as tourism, trade, aviation and finance, oil now makes up less than 2 per cent of the emirate’s GDP. Dubai has the busiest international airport, the largest artificial port, and what will probably soon be the biggest airline in the world.
Oddly enough, Dubai has perhaps not made as much of its energy sector as it might have done. It has, for example, not become a major hub for oil trade and equity listings in the same way as Singapore or London, nor a centre for refining and petrochemicals such as Singapore.
But part of Dubai’s genius has been to attract business and capital from the rest of the region, just as Singapore and Hong Kong previously played the role of windows into China. Visitors from oil-exporting areas such as Saudi Arabia, Abu Dhabi, Iran and, farther afield, Russia and Nigeria, have flocked to the city to do business and spend, enjoy or invest their money.
Apart from Russia, where recession, sanctions and currency collapse had already led to a sharp drop in visitors to Dubai, the oil price fall has not yet sharply curtailed spending in other major trade partners.
But some impact is inevitable. Confidence in the wider Middle East economy has already suffered, probably contributing to Dubai’s property market slowdown. And if oil prices stay low for an extended period, budget cuts in major Gulf neighbours will translate to fewer visitors spending their oil-funded bonuses in The Dubai Mall or Downtown real estate brokerages.
However, this test of lower oil prices may come at a good time for Dubai – when national banks are in better shape, the emirate’s debt restructuring is largely complete, and when regulatory action has already cooled off a nascent real estate boom in 2013.
Dubai’s recent trajectory has aligned perfectly with dominant global trends that will give it a measure of protection against oil prices. World transport and trade benefit from lower fuel bills – bringing down the cost of airline tickets. Major energy-importing trade and tourism partners – China, India, Pakistan, Turkey and Egypt – will benefit from reduced oil costs. And close trade links with Iran should revive if United States-led sanctions on Tehran are lifted.
The city also benefits directly from lower energy bills. It will save about $1.2 billion annually on cheaper liquefied natural gas imports. Government-owned Enoc said it spent $735 million on subsidising petrol sales in 2011, a figure that should also fall. Dubai has since 2013 moved faster than any of its neighbours to embrace solar power.
In general, the Emirate is one of a few – almost the only – of the Mena constituents to use its favourable geography to ride the wave of globalisation and the rise of Asia. In turn, that lifts the whole UAE and gives the country greater resilience. But the Middle East’s major oil exporters are less favourably placed. They cannot all be finance and tourism hubs. High-tech manufacturing, reduced subsidies and greater regional integration are all parts of the answer.
Ultimately, perhaps the question should not be whether Dubai’s model can cope with lower oil prices. Oil will always be a volatile commodity, and its future is uncertain. Instead, the key task is to make the bold and sometimes difficult choices to ensure continuing success, regardless of the vagaries of energy markets.
Robin Mills is head of consulting at Manaar Energy, and author of The Myth of the Oil Crisis
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