Before diving into the latest analytical piece from Karl Miller, just a comment on President Lula’s surprising victory in the just concluded presidential election in Brazil. The betting markets favored Bolsonaro and quite a few people lost money betting on his victory (but the bookies are happy). Lula’s victory means that BRICS remains intact and that Donald Trump took a beating. Is this a harbinger of what awaits Trump on 3 November? Now, on to Karl Miller.

For two decades the United Arab Emirates sold the world a fantasy: an oasis of glass towers, infinity pools and duty-free gold, floating serenely above the chaos of the Middle East. Book your stopover, the ads said. Nothing bad ever happens here.

Karl Miller’s latest assessment of the UAE economy, dated October 25, reads like the customer reviews after the brochure promises didn’t pan out. One star. Fewer guests than advertised. Beach closed due to crude oil. Please bring your own water.

Where did everybody go?

Let’s start with the tourists, or rather the lack of them. From January through August, Dubai recorded 6.97 million international overnight visitors. In the same period last year it had 12.54 million. That is 5.57 million fewer visits, a drop of 44 percent. It turns out that “within drone range of Iran” is not a selling point in the travel brochures.

The hotels noticed. Average occupancy in the first half fell by about 30 percent compared with a year earlier, and room rates fell 7 percent, which together knocked roughly 35 percent off what each room earns. Dubai International Airport, which likes to call itself the world’s busiest hub for international passengers, handled 31.5 million passengers in the first half, down 31 percent. Air cargo fell 29 percent. The crossroads of the world has become a place people fly over.

In fairness, there was a rebound. Hotel occupancy climbed from a dismal 36 percent in March to 66 percent in August. Then the oil started washing up.

Surf’s up, and it’s black

This month the UAE closed the beaches of Umm Al Quwain after a slick more than 60 square miles in size, apparently from a supertanker struck on October 9, came ashore. Fishermen were told to stay away. The government assured residents that the smell posed no health risk, which is exactly what you want to hear from your vacation destination.

Miller points out that the cleanup is not a one-and-done affair. Oil buries itself in sediment, soaks into mangroves and comes back with the tide. Seafood buyers find other suppliers. Marina operators scrub hulls. Tourists who see pictures of oiled beaches book Thailand instead. A completed cleaning contract, as he dryly notes, does not bring back the customers.

The real problem: water

Now for the part that should make the princes of Abu Dhabi sweat, and not just because of the heat. Umm Al Quwain is not merely a beach. It is home to the NAQA’A desalination plant, with a nominal capacity of 150 million imperial gallons a day, about 682 million liters. According to Miller, that single plant accounts for more than three-quarters of the desalination capacity of Etihad Water and Electricity, the utility that serves the northern emirates. In Dubai, the Jebel Ali complex alone provides roughly 88 percent of the emirate’s desalination capacity. Diversification, it turns out, is something the UAE practices with its investment portfolio, not its drinking water.

I discussed the following in my previous piece, but it is worth reiterating. Desalination plants have one small requirement: clean seawater. When oil reaches an intake, operators have to throttle back or shut down to protect their filters and membranes. Miller runs the numbers on a hypothetical, and I stress hypothetical, 50 percent restriction at NAQA’A. That would remove about 341 million liters of drinking water a day. Over a week, it would be 2.4 billion liters.

Not to worry, say the optimists. We’ll truck it in. Miller did the math on that, too. Replacing the lost water with 30-cubic-meter tanker trucks would take 11,365 loaded deliveries every day, not counting the trips back to refill. Picture eleven thousand water trucks clogging the roads of the northern emirates every day in the summer heat. It is a solution in the same sense that bailing out the Titanic with a teacup is a solution.

And the backup supplies? Fujairah’s plants on the Gulf of Oman can send water inland, but Fujairah has its own oil problem and its own exposure to Iranian strikes. The strategic reserve at Liwa is designed to deliver about 182 million liters a day in an emergency, a useful contribution that would cover about half of the NAQA’A shortfall in Miller’s scenario. As he puts it, having a big tank somewhere does not mean you can get the water out of it fast enough or move it to where people are thirsty.

The hotel math

Miller also built a simple model of what happens to a 1,000-room resort when the guests stop coming. Take a hotel that normally runs at 70 percent occupancy and AED 1,000 a night, cut its rate to AED 800 to lure people in, and assume it still sits 90 percent empty. Give it AED 10 million in cash. With fixed costs and debt service, it runs dry in about 37 days. Add a million dirhams a month for trucked-in water and beach cleaning and you have about a month.

To be clear, Miller is careful to say that 90 percent vacancy is a stress test, not a measured UAE-wide average. But the stress test makes the point. At the discounted rate, a hotel needs to fill about 56 percent of its rooms just to break even on cash. Dubai’s real occupancy was 36 percent as recently as March. Somewhere a hotel owner is calling his banker and practicing the phrase “principal holiday.”

That pain does not stay in the hotel. Delayed payments move down the line to laundries, food suppliers, taxi drivers and contractors. Miller’s property model shows that a 25 percent drop in income combined with investors demanding a 7 percent return instead of 6 knocks about 36 percent off the value of an income-producing property. That is not a crash. It is just enough to make every refinancing conversation in Dubai very awkward.

The hub that can’t promise delivery

Then there is trade. The UAE does not just sell goods. It sells speed and reliability, the promise that your container will arrive on schedule. When ships have to dodge drones and spills, that promise gets expensive. Miller calculates that a 30-day delay on $10 million of inventory, financed at 12 percent, costs about $99,000 in interest alone. That wipes out roughly a fifth of a typical distributor’s gross profit before a single carton spoils. Do that a few times, and customers start routing their cargo elsewhere. Once they find a reliable alternative, they rarely come back.

Mirage economics

Miller is not predicting the collapse of the UAE. He says plainly that the Emirates retain real strengths, that some industrial and logistics businesses remain resilient, and that the worst-case scenario, with water restricted on both coasts at once, is a contingency and not something that has happened. But his central planning case is “prolonged impairment,” and that should worry anyone who was told this war would be short and its costs borne by Iran.

The UAE built a dazzling economy on three assumptions: that tourists would keep coming, that ships would keep sailing and that the sea would keep supplying fresh water. All three now depend on the next missile not hitting the next tanker near the next intake. Another round of American and Israeli strikes on Iran will invite another round of Iranian retaliation, and the Gulf has already shown where the bill lands.

Still, look on the bright side. The beaches are uncrowded, the hotels have plenty of rooms, and the views of the tankers burning offshore are spectacular. Just bring your own water.

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Nima and I discuss Netanyahu’s beef with the IDF Chief:

Hilarious opening with Brandon and Mario:

Sulaiman and I are chatting when news breaks that Lula won:

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