The Dubai debt default seems to have inspired a bit of fear in the U.S. But is there any real reason for it? U.S. banks have minimal exposure to Dubai's debts -- most of the banks that would suffer if Dubai defaulted are located in the Middle East. Nevertheless, U.S. markets fell 1.7% Friday during a holiday-shortened trading day -- after futures suggested the market would be down 2.7%. But if Dubai's oil reserves exceed its debts, it could sell oil to repay them.

The extent of Dubai's energy reserves is in dispute. The New York Times reports that Dubai's oil reserves are minimal, noting it "is one of the few member states of the United Arab Emirates [UAE] that has little oil wealth of its own." (Dubai is one of seven emirates that together make up the UAE.) Yet other sources suggest Dubai has significant oil and gas reserves -- worth $311.4 billion at today's prices -- a figure that does not strike me as minimal in light of Dubai's $80 billion in debt

How so? Dubai has 4 billion barrels of oil in reserve, which represents 4.1% of the UAE's 97.6 billion barrels as of January 2007, according to the Energy Information Administration. Dubai also has 2% of the UAE's natural gas reserves, according to the UAE government. The Energy Information Administration estimates that the UAE's gas reserves totaled 214.4 trillion cubic feet (TCF). The $311.4 billion consists of $296 billion in oil (4 billion barrels @ $74/barrel) plus $15.4 billion in gas (4.29 TCF at $3.60/thousand cubic feet).

I don't know whether it's legally possible for Dubai to do this, but if it wanted to pay off its $80 billion in debt today, it could theoretically do so nearly four times over by selling oil and gas reserves and using the cash to repay its lenders.

As things stand, Bloomberg News reports that the UAE has decided to repay borrowers selectively on behalf of Dubai. While the facts about Dubai's problems may not have been disclosed fully, if the EIA's data are correct, Dubai has the energy assets it needs to pay off its obligations -- and if Dubai can't sell enough of those quickly, the UAE's energy resources are at least 25 times greater.

Foreign banks have a total of 0.4% of their total cross-border exposure to the UAE, according to the Times, which seems small to me. So unless there's some enormous surprise out there from the UAE that the markets don't know about, this Dubai debacle strikes me as an over-reaction.

Peter Cohan is a management consultant, Babson professor and author of nine books, including Capital Rising (due in June 2010). Follow him on Twitter. He has no financial interest in the securities mentioned.


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