PRICE WARS - How the Commodity Markets Made the Chaos in Ukraine
Putin's aggression confirms the predictive model of PRICE WARS - that real world chaos is created, spread, and amplified by the chaos in the commodity markets.
Last month, I was asked by Bloomberg’s Francine Lacqua what was original about my new book Price Wars.
I said: the commodity markets function as engines of chaos: a feedback loop that turns chaos in the real world into chaos in the markets, which in turns creates more chaos in the real world and more chaos in the markets, and so forth.
I warned that the Russia military build up was being ‘priced in’ to the markets by commodity speculators, and these higher prices had the effect of emboldening Russia, making a bloody conflict all the more likely. Unfortunately, that war has arrived. And the the chaotic engine, I fear, is just getting started.
The war is only happening because oil pricse are high. All of Moscow’s military adventures - Afghanistan in 1979, Georgia 2008, Ukraine 2014 & 2022 - have occurred in years when oil prices were historically high. They not only flood the Kremlin with cash, they also prevent punitive sanctions. With energy scarce, any embargo on oil and gas would cause prices to soar. Already facing wide-spread inflation, politicians across the West are doing everything in their power to keep a lid on prices. This is why, despite all the tough talk in recent days, the EU-US sanctions exempt Russia’s energy exports.
The high prices are inflated by commodity traders and financial speculators. As the Nobel prize winning economist Robert Shiller has show, speculators tend to over react to perceived threats to supply, and so amplify the price swings as a result. This is just as true for algorithmically-driven trade, as for human traders, which have been, according to most analysts, driving the upswing in prices over the last six months. These speculator-inflated prices have inflated Moscow’s ambitions - and provided the means for achieving them.
Surging wheat prices are sending a tsunami of hunger and instability across the world. The high oil prices greenlit the invasion, and the invasion has caused commodity prices to spike. Wheat prices on Thursday reached highs not seen since the 2008 Global Food Crisis and 2010-11 Arab Spring revolts. Russia and Ukraine produce a third of the world’s wheat exports, and once that supply is disrupted, food prices will climb even higher globally. It is just a matter of weeks - perhaps even days - before a tsunami of hunger sweeps much of the developing world triggering an avalanche of riots, revolts, and even revolutions.
High oil prices will embolden other petro-politicians. Putin is no the only autocratic leader of an oil-exporting nation. They are all receiving windfalls right now, including Mohammed Bin Salaman, the de facto ruler of Saudi Arabia, whose war in Yemen is the worst humanitarian crisis of the century. Not only will oil-fuelled conflicts such as this one receive bonus funding, but much of the windfall will also be stashed in the West’s financial capitals causing house prices to surge.
The West will be destabilised through (1) inflation, (2) inequality, (3) refugees. Inflation over the past year has already undermined incumbents across the West, from Biden to Johnson to Macron, and as energy prices raise further, their political captial will be undermined at precisely the moment they need it to oppose Putin. The widening house price inequality that a surge in petrodollars will bring, will further deepen political divisions and stoke right-wing reactionary politics, just as it during the 2010s. As these price wars combine - the war in Ukraine, the disorder from high food prices, the rise in conflict from high oil prices - they will lead to a surge in migration globally, which, when exploited by populist politicians, will further undermine the increasingly fragile political liberal order.
Analysis aside, the events of the last few days are difficult to watch. I went to the Donetsk People’s Republic for the book and documentary, and filmed in the trenches on the front line with the Russia-backed separatist fighters. Even then, the whole thing felt surreal. The war was already five years old, and seemed stuck in a state of suspended animation. Nobody there could tell me how the conflict would end.
I was there to investigate how the explosion in the oil markets created explosions in the real world. It didn’t occur to me that the obvious ending for this war would be yet another market event. And it’s no coincidence that it has taken yet another detonation in the derivative markets to bring about detonations inside Ukraine’s borders once more. We truly are living in a world of price wars.