Oil Price Fall-start of something bigger?

The sudden drops in oil prices should ring a bell with those of us who remember the wild fluctuations of the past. Older readers will recall the crisis of the winter of 1973-74. Crude pumped mineral oil has been central to our civilisation since at least 1900. Victory in the Second World War ultimately depended on who controlled oil resources, as both sides knew well. Oil has sat at the heart of car culture, shopping mall culture and holiday culture, and lots more, ever since 1945.

This is why price fluctuations in it are so important. Along with a few other things like the Dollar, US Treasury Bonds, Gold and certain metals futures, it is a key indicator of the speed and direction of travel of the world economy. Like one of the key indicators on your car (no joke intended)-the speedometer perhaps. The recent wild drops (as I write US prices are negative and Brent at $16) indicate that something very strange is happening.

It could of course be supply and demand clearing to find a price, the classic expression of a healthy market economy, and just another economic calculation. But if we are going to talk calculation, we should remember the advice of the great Viennese economist Ludwig von Mises, whose paper on this subject appeared in 1920.* It was, he said, the central feature of a capitalist economy that it has a price mechanism, particularly in capital goods. Planners in a socialist economy could never find a rational price, and so would never be able to allocate resources in an efficient manner. So far, History has proved Mises right, confirming his thesis by the fall of the Soviet planned economy in 1991.

But what happens in a capitalist economy if all of these price signals start to fluctuate wildly at once?

Fortunately it has not happened yet. But anyone would be advised to keep an eye on the forward prices of things like US bonds, metals futures, and Euro spreads in the next few months. It might be a very bumpy ride indeed.



#mises #economiccalculation #oilpricefall

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