Dubai Rides the Oil Boom

New towers spring up along a highway through Dubai's Marina district.

DUBAI—It was the kind of publicity stunt upon which this desert boomtown was built. Dubai's iconic sail-shaped Burj Al Arab hotel recently began offering what it billed as the world's most expensive cocktail. Well-heeled patrons could order a glass of 55-year-old Macallan single-malt Scotch, with custom-made bitters and ice cubes made from water near the Scottish distillery, served in an 18-carat gold Baccarat tumbler. All for just $7,440 a pop.

This being Dubai, it took only three days for a guest to buy not just one but two of the pricey concoctions.

It is easy to get intoxicated by Dubai's phenomenal marketing machine, which has made it into a city of superlatives. Along with the world's most expensive cocktail, it claims the world's tallest building (due to open in 2009), the world's tallest all-suite hotel, the world's largest man-made islands, and the first indoor ski slope in the desert. And even though a shopping mall billed as one of the world's largest is to open in August, an even larger one is already under development.

But beneath the one-upmanship, there is far a more serious transformation, one that is turning Dubai into the business, financial, and perhaps tourist center of a newly invigorated Persian Gulf region. With oil prices near record levels, the Gulf is on the receiving end of a historic transfer of wealth from oil consumers that dwarfs previous oil booms, even after adjusting for inflation. Just between 2002 and 2006, Gulf economies doubled. And this time, in contrast to earlier oil booms when most of the profits were reinvested in the West, Gulf states like the United Arab Emirates, Qatar, and Saudi Arabia are investing much more of that windfall at home.

More than $1 trillion of construction projects is currently underway in the Persian Gulf states, but the changes aren't just about the vast amounts of concrete, glass, and steel being erected. Indeed, this unprecedented wealth transfer is starting to rewrite the fundamental balance of power in the world economy, says Robert Hutchings, who as the head of the U.S. National Intelligence Council until 2005 led a project looking at what the world might be like in 2020. The rise of the Gulf economies "should give us pause about how much we Americans and the countries that created the global financial system 60 years ago still have control of it," he says. "The globalized economy doesn't require huge territory or militaries to translate into real power."

Transformation. Today, Dubai, with its outlandish developments and seemingly infinite number of construction projects, stands as the most high-profile physical manifestation of the Gulf's transformation. The second-largest of the seven emirates that make up the UAE, Dubai has nearly run out of its own oil. (The UAE's oil is concentrated around its astonishingly wealthy capital, Abu Dhabi.) But Dubai has successfully turned itself into a post-oil economy that feeds in part on the oil wealth of its neighbors, who have been happily investing in the city's red-hot real estate market. The UAE's economy has averaged 9.3 percent annual growth over the past five years, even after removing the effect of oil prices. In the leisure and entertainment sector alone, Dubai has launched or is planning an estimated $381.4 billion of projects, according to a study by Fast Future, a U.K.-based think tank. The newest plan calls for an eco-hotel designed by Brad Pitt.

The city's secret is a unique combination of marketing acumen that would make P. T. Barnum proud, an unusually tolerant society that has thrown its doors open to foreigners, and an attitude that is all about making money. "We believe in sharing the wealth," says Khalid al-Malik, CEO of Tatweer, a colossal, government-owned developer. Western companies, including a growing number of U.S. ones, are scrambling to create or expand regional offices in Dubai. "The door is open for more cultural and business engagement," says Paul Sutphin, the U.S. consul general in Dubai, "and we should walk through it."

There is much, much more to come. Dubai today is a place where construction sites seem to outnumber existing buildings, and the infrastructure, whether it's the roads or the electric grid, struggles to keep pace. Indeed, given the level of hype, the city is oddly underwhelming for many first-time visitors. Traffic is nightmarish, and the sky is perpetually choked with dust from the 24-hour construction activity.