von Mises' Nightmare
- Karl Johansson
- för 2 dagar sedan
- 5 min läsning
The oil market is broken, and that raises serious questions about if price signals are working. The fact is that the bastion of capitalism, the market itself, is now performing the duties of a command economy by setting the price of oil arbitrarily rather than with reference to supply and demand signals.
Pick any random energy analyst from anywhere with any politics and any institutional interest and their view will be the same: the situation in oil markets is catastrophic and the futures markets are mispricing both the current level of disruption and the possibility of a quick resolution. Many economists share that view, most recently I saw Gabe Eckhouse from the Stockholm School of Economics making that case. Are the markets broken, as I argued in a previous post, or is something more esoteric at play?
My first instinct is to look to economic structure for an explanation – I’m toying with the idea that America has Dutch disease in its financial sector, which I may write about if I am able to develop this thesis. Perhaps American banks and financiers of all stripes need the oil price to stay low because if the kayfabe is broken then the profitable merry-go-round of all time highs, mega deal rounds for unlisted AI companies, and blockbuster IPO’s like SpaceX and potentially Anthropic has to end. Ignoring geopolitical risk has been a profit maker for the last decade, and physical reality and common sense has not been an impediment to investment themes like AI, the metaverse, crypto and stable coins, and autonomous vehicles. If you acknowledge reality you may be unable to limit it to oil, and before you know it all manners of bubbles will pop.
But if this is true, even partially, then the Western world rests on deeply flawed foundations. If it turns out that markets are not just imperfect, but actively bad at their core function, price discovery, then the whole project of neo-liberalism needs to be reassessed from first principles.
The core idea of the intellectual movement which laid the foundations for the market revolution in the 1980’s and 90’s was that central planning distorted incentives by suppressing price signals, which are the best way to organize production and consumption in a society. The true price, and by extension true need for a product or service could be found by letting different people with divergent views use their real money to make exchanges. That in turn leads to the most efficient, and the most pro-social distribution of scarce resources.
From there liberalisations in all corners of the economy become easily justifiable, even necessary, to make sure price signals are sent and received, and by extension the economy allocates resources optimally. This view imposes ideological baggage on believers, and leads to pro-market views which are questionable unless you accept the premise that price signals are paramount. To put in it more concrete terms, market pricing for education, health care, and land are all liable to create wild inequality, but von Mises’ intellectual heirs ignore such critiques because they think the gains will be greater than the costs. But that logic only holds given their assumptions, and if those assumptions are untrue then we have to reassess not just individual policies since the market revolution of the 80’s and 90’s, but the entire political project and all its reforms.
Markets are not created equal. Larger, more liquid markets with a wide range of both suppliers and buyers are better, and few markets are as large and wide as the oil market. It is not perfect of course, oil from different regions have different properties, and there is a notable distortion on the supply side in the form of OPEC+. Still, before the war the IEA’s numbers showed that the global oil market bought and sold about 105 million barrels per day. That is 16 695 000 000 litres of oil per day. If this market cannot be trusted to produce an accurate price signal, no market can.
According to Trading Economics the brent benchmark oil price peaked in 2022 at $119 per barrel, in the wake of Russia’s invasion of Ukraine. Russia produced almost 10 million barrels per day in 2022, and after all the various sanctions and prohibitions against buying Russian crude it produced about 9 million barrels per day at the end of 2025. The threat of reduced Russian exports (and Russia does not export all of its crude oil, not even close) made the price spike to $119 but the strait of Hormuz being closed, where before the war some 20 million barrels per day moved through, which according to BCA Research has seen a drop of 14 million barrels per day of oil exports(!), the price peaked at $126 according to the BBC.
This just does not make sense.
My colleagues in Manilla have regular blackouts due to the current energy crisis. Spirit Airlines has gone bankrupt due to increased costs for aviation fuel, as has Magnicharters in Mexico, Joy Air in China, and Zenith Airlines in the UK. Governments across Asia have issued guidance to work from home if possible, some have limits on when and how AC can be used, and some countries have even shortened school weeks to save energy. Just look at the IEA’s tracker of energy crisis responses. Madagascar, the Marshall Islands, and the Philippines have declared national states of emergency. This is not a small supply hiccup, it is worse than 1972. So why are the markets not pricing this?
I genuinely do not know, and the mere fact that such a notable and significant distortion in market price in one of the most traded commodities in the world is possible casts serious doubts on a society based on price signals. Ludwig von Mises would probably argue that I’m missing something, that the oil market is smarter than I am. People who share his view say that if the strait opens tomorrow then the oil market will have been proven right; that it wisely saw through the confusion and the battle over the narrative and realized that a deal was imminent. But I just don’t buy that explanation. If the market is so forward-looking, then was it correct to price oil at $99 the day before the Philippines declared a state of emergency? Or to price oil at $86 on the day the ceasefire was announced, given that the ceasefire didn’t open up the strait?
The oil market is essentially performing the function of a communist functionary; it is suppressing price signals and distorting the market-determined efficient allocation of resources by keeping oil artificially cheap. If not even the markets can be trusted to determine prices without an agenda, the world must surely be on the road to serfdom. This is in some ways the worst of all worlds: oil is being wasted in the rich world due to its artificially low price while the developing world is suffering real actual shortages, the pressure to end the war is kept down, and the financial markets are booming while the economy grinds to a halt outside the gleaming towers on Wall Street. von Mises must be rolling in his grave.
If you liked this post you can read a previous post about why I don't belive there'll be a deal to end the war in Iran here or the rest of my writings here. I also have a section for longer reads I call essays here, I particularly recommend my series called The Bird & The Technoking exploring Elon Musk's takeover of Twitter, and its political and cultural implications. It'd mean a lot to me if you recommended the blog to a friend or coworker. Come back next Monday for a new post!
I've always been interested in politics, economics, and the interplay between. The blog is a place for me to explore different ideas and concepts relating to economics or politics, be that national or international. The goal for the blog is to make you think; to provide new perspectives.
Written by Karl Johansson
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Cover photo by Peter Jochim from Pexels, edited by Karl Johansson
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