Peak oil panic? Dubai or not Dubai?

Peak oil panic? Dubai or not Dubai?

Summary: Dubai's oil reserve are dwindling and now their rampant investment program has hit a rock.

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Could the mushrooming Dubai debt crisis be a preview of what peak oil will produce among the oil-selling nations?

Dubai--meaning the few poweful men in control--launched itself on a campaign to become the combo Las Vegas, Miami and Wall Street of the Mideast. That meant huge construction projects and rampant purchasing of key properties across the globe. A large portion of the action in Dubai is run by sovereign firms, belonging primarily to the Dubai government and its leaders. However, they've borrowed up to $60-billion from all over the globe. Stock markets today tanked when the story broke: no interest payments for six months from one arm of Dubai World.

Perhpas you recell the cause celebre in Washington when Dubai bought a British company that controlled a slew of American ports? Eventually the Dubai sovereign company sold its U.S. ports to the All-American patriots over at AIG. And we all know how good AIG has been to Americans.

Why would tiny Dubai start grasping and reaching for a different future? Because they know their oil is running out and they don't wish to go back to living like nomads or sailing little wooden boats around the Persian Gulf. Of course, now it appears their investment plans looked better in theory than in practice. Courtesy Dubai Palm Islands.

ANOTHER WAY? THE NOR-WAY

Another major oil exporter has taken a far different approach to its excessive oil income and the eventual end of its oil reserves. Norway now has the second largest sovereign investment fund in the world, behind only Abu Dhabi. Yes, tiny Norway ahead of China and Saudi Arabia.

The streets in Norway are not paved with gold, but they are all well-paved. Every resident is covered. Health insurance, check. Lifetime pension, check. Universal child support, check. One-year paid maternity leave, check. Sick pay for ALL jobs, check. No university tuition, check. What an American news service derides as cradle-to-grave welfare.

Knowing oil pretty well, Norway has invested in potential and working oil fields from Kurdistan to Angola. They've known the Norwegian oil supply is limited and they began years ago to invest in alternative energy. They did not build a large palm-shaped island like Dubai, however.

Wherever it leads this Dubai story will re-heat the debate over who's right or wrong on the amount of oil left. I recently blogged about accusations that the IEA has been cooking the books to keep American oil interests comfy.

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20 comments
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  • Harry, please ignore the deniers

    They will try to quash any voice of reason. I believe
    they hope to maneuver themselves into a position where
    they can argue that they should not be affected by the
    consequences because they don't believe in man-made
    climate change. Pure selfishness.

    Keep it coming. We are many who read your posts and
    agree.

    Norway has in general been prudent and wise in the way
    they've spent the income from their (vast) oil
    resources. Still, the oil money has skewed some parts
    of the economy. Food, for instance, is ridiculously
    expensive in Norway.
    honeymonster
    • Food, for instance, is ridiculously expensive in Norway.

      That has always been the case, even before oil. Neither the land nor the climate lends itself to large scale, efficient farming.

      In addition, the Norwegians decided not to allow a lot of large supermarkets at the expense of smaller, locally owned food stores, in part to try to preserve the sense of community. This also helps keep food prices high.

      I have to agree with you however, developing from a relatively poor country after the Nazi occupation to a rich and very prosperous country today, they are taking great care of their new-found wealth.

      Economister
      • If we weren't subsidizing our farmers....

        food would be quite a bit more expensive here. The fact that Norway has food is a good deal considering the nations that don't.
        bjbrock
        • A bit of history for you

          http://www.norway.si/About_Norway/history/upto1814/unionden/

          The last paragraph is the most important in this context. The naval blockade caused extreme hardship and starvation. The Norwegians baked bread from flour made from tree bark.

          Since that event and with ultimate independence about 100 years later, Norwegian policy has been to never become this vulnerable again. Farms in many parts of the country are small and in steep terrain, which makes it much more expensive and difficult to mechanize. Norway did not want these areas depopulated and decided to make the farms and communities viable. This has also resulted in higher food prices.

          Still, (on a cost of living adjusted basis), I believe Norway has one of the highest standards of living in the world.
          Economister
  • Alarmist?

    Dubai's total sovereign bond debt is larger than the Madoff scam. And the alarm is in the stock markets, not my doing. If Dubai's inability to pay monthly interest spreads across the whohle fund it'll be much bigger than a mere financial fart. And it will cause investment firms to look closely at the other large Persian Gulf funds.
    Gotta give Dubai credit for not pretending their oil will last forever. That's still the main argument of the oil industry: no peak oil in your lifetime.
    --Harry Fuller
    atowhee
    • I wonder what the impact of this on the price of oil

      Less oil available means higher prices but on the other hand it may also mean there will be less demand for oil because it could put a dampen on many investments.
      The Mentalist
      • It is complicated, but...

        It could certainly affect the economic recovery. There is no guarantee that Dubai will be able to start paying in 6 months. I remember when the Reichmans went under. Many financial writers wrote in the Reichmans' defense stating that they had all these assets, were too big etc, etc. Well, they went under. If your investments don't start generating sufficient revenue to cover the costs, including debt servicing, you are in big trouble.

        Dubai may be forced to start pumping/selling more oil if they can, in order to service the debt. How the market reacts will depend on the other cartel members and non-cartel producers. Short term, oil prices are fairly inelastic, which means that increased production will result in a significant price drop unless other producers cut back. The result could actually be lower revenue for Dubai and a delay in the transition to a more efficient, lower emission world economy. Another financial crisis would hurt the economy, but lower oil prices would help the economy.

        It will be interesting to watch this unfold.
        Economister
        • That's the problem, more pumping does not necessarily more money

          I suspect they are running out of cheap oil and the oil they have in abundance is of the expensive variety.
          The Mentalist
    • America's energy plan....

      counts on mid-east oil running out. It has always been plannned to burn their oil first and save what we can of ours.

      When the time is right the US will switch to alternative fuels as well as our own reserves. And anyone who has invested in the future of mid-east countries will be in a big hurt. Especially investing in over priced luxury items like man made islands and casinos.
      bjbrock
  • Facts are always a problem for ideologues

    Also what countries weathered the global economic crisis best? The socialist and mixed economies like Australia.

    When are Americans going to realise that they are paying dearly for essential services just so the middle-man can make a lot of money, a middle layer called private enterprise.

    Health, Education, Welfare and Communications should all have public providers. The rest of the world understands this to a greater or lesser degree, but Americans would rather pay more for bad health care, just so a few people can get rich.

    The oil companies have known for years that oil has peaked, but they're still trying to make as much money as possible and now they're trying to get paid for polluting.

    The climate sceptics want to believe that we can't have any effect on a small closed planetary system, now they want to believe we had an infinite amount of dinosaurs to turn into oil.
    tonymcs@...
    • Leave them alone

      Let the US believe what it believes and do what it does while the rest of the world moves on. The 21st century will be hard on the US as it faces a dropping dollar and it declines to a no. 2 or no. 3 position in the world.
      bye bye
      Bradish@...
    • And the dreamers

      "Also what countries weathered the global economic crisis best? The
      socialist and mixed economies like Australia."

      You don't seriously believe Australia survived the GFC because of
      public schooling (poor performance compared to the 40% in private),
      high-ish welfare but low unemployment benefits (not a problem with
      continuing low unemployment), a communications sector which is
      100% non-government, and a mixed public/private health care
      system with spotty public performance (see NSW and QLD)?

      Australia weathered the GFC because i) strong federal financial
      position (zero debt) , ii) strong banking oversight, iii) massive mineral
      exports (thanks China), and iv) high level of immigration supporting
      overpriced housing (Banks continue to be sound).

      If you to see how the "socialist and mixed" economies without these
      benefits performed have a look at the UK;-)

      Harry is also way off the mark with his tie between oil and the finance
      troubles of these projects in Dubai. The bottom line: they were bad
      investments requiring massive debt in a market where the easy
      finance has dried up.
      Richard Flude
      • Way off?

        Dubai would not be making the wild investment gambles if it had, say, another century-worth of oil in the ground. And it would have more oil if we humans were not using such prodigious amounts to run our cars, agribusiness and industries.
        Many nations are addicted to oil, not just the U.S. What, for example, will Saudi Arabia or Venezuela do when they finally come to grips with their dwindling oil supply and thus dwindling revenue? Or even Mexico? Political disruption is highly likely in many authoritarian nations now addicted to oil income. Meanwhile other nations may choose to reduce their addiction with sunlight, wind or nuclear treatments. That could mean an increase in greentech investment and application.
        --Harry Fuller
        atowhee
  • That last link has a problem.

    It connects to a password protected site that Firefox says is unsafe anyway.
    Bill4
  • Norway . . .

    "Every resident is covered. Health insurance, check.
    Lifetime pension, check. Universal child support,
    check. One-year paid maternity leave, check. Sick pay
    for ALL jobs, check. No university tuition, check."

    Low population and land mass, check.

    What often works on a small scale may not scale up to
    a country the size of the USA.

    Also - higher cost of living - check. About 30%
    higher. Very likely due to the large role of
    government.

    Also - about 20% of their GDP is from oil revenues.
    That's likely to be the primary reason why they can
    have a high GDP even with large government programs.

    Economics is complicated - and the idea that there are
    no tradeoffs to having a "cradle-to-grave welfare
    system" is frankly ignorance. Everything in economics
    is a tradeoff.
    CobraA1
    • Trade-offs?

      Of course there are trade-offs. Culture and money dictate that everything will be a trade-offs. Almost nothing we humans do is truly sustainable. Want wood, kill tree. Want nail, mine coal and iron. Want cheap corn chips, nitrate to death the Gulf of Mexico. It is important for us Americans to realize what trade-offs we are already making. How we sudsidize the oil industry so the Saudis can sudsidze their brand of Muslim fundamentalism. We subsidize Corn Belt agribusiness so our food is full of corn-derived chemicals. We do NOT subsidize certain other industries because they lack the powerin the U.S.Senate as determined by our 200-year old constitution.
      Sure we have trade-offs, as do the Norwegians. But it is clear we should understand there are other ways of living and organizing a country. China is more complex and larger than the U.S. but they can have high speed trains? We Yanks need to wake up to our rapidly declining position in the economic landscape. Setting debt records every month is NOT a sustainable economic path. Anything thing that must end will eventually end. See Enron, Madoff, Bear Stearns, Netscape et al.
      --Harry Fuller
      atowhee
      • Could not agree more with what you are saying.

        In addition, I understand why you used Norway as a comparison in your blog. Since some of the posters like to jump on Norway's social programs, it may be worth noting that Norway does not make a particularly good example of excessive socialism. If anybody wants to look at an example of social programs gone wild, Sweden a decade or two ago makes a much more interesting case study.

        As always, when excesses and irresponsibility become the norm, you start to encounter something called reality. Sweden was forced to abandon their foolishness. My guess is that the US, maybe in a slightly different way, will be forced to deal with the reality of its situation also. The problem the way I see it is that governance in the US is a lot more complicated that in many other countries. The "checks and balances" instead become corruption and inaction.

        But then again, I am not telling you anything you do not already know all too well.
        Economister
    • Most intelligent post in this thread so far...

      4.8 million...

      That's the population of Norway. That's about the equivalent of a large city in the U.S. and other countries.

      It's like you said, what works in a small country will very likely fail in a large country with more diverse regions and a much more diverse population.

      Nobody in their right minds should be comparing a very small country to another country the size of the U.S. or even China. It's like comparing what the city of Los Angeles does with what the whole U.S. does.

      The problem that Norway and countries such as Dubai have is mostly one of geography. Countries in agriculturally poor regions might be able to hold off the inevitable for a time with oil or some other naturally occurring mineral or product, but once their most abundant source of income dries up, they're bound to go back to being geographically and economically poor. However, it is true that with a small population to sustain, it will seem as if that country is being successful. But the reality is that, the leadership of those geographically poor countries have to be worried. That's why they have to try to invest to become independent of oil or some naturally occurring mineral in their geography which could eventually become scarce.
      adornoe
  • Oil is not running out!

    It is about transfer of wealth from the United
    States to the other 3rd world countries.

    Americans are so foolish to see that the job
    loss is increasing and Oboma wants to bankrupt
    you so you are dependent on the Gobment...

    Wake up, you voted for a socialist because you
    wanted something for FREE!

    Sorry everything has a price and your job was
    the price you paid.
    Use_More_OIL_NOW
  • Do without electricity, computers, OIL

    Then you will have fulfilled the Oboma communist
    agenda!

    Wear your red communist jacket and worship the leader.
    Use_More_OIL_NOW