Have you heard that the price of a barrel of crude oil has fallen below $10? At the beginning of the year, it was $60. And it was not that long ago that it was above $100. Crazy!
What does this mean? First off, it is telling us that supply has exceeded demand in a market in which supply-demand imbalances have big effects on prices. Demand has collapsed as a result of the COVID-19 pandemic that has kept us off the roads. This has happened despite a recent agreement among global oil producers to curb supply.
We are also learning that regular storage facilities, including supertankers, are full up! Those who have regular storage no longer have room to take on more crude.
Is this an example of a market failing to do the job? Quite the contrary!
The big drop in the global price of oil has been the means by which information about the current demand-supply imbalance has been transmitted with dispatch around the earth, to wherever it might make a difference. It is serving to prompt anyone with irregular types of capacity to step in and help. What is bought and stored now can be sold in the fall for a gain. Indeed, futures markets are telling them that the oil purchased today can be sold in the fall for $30 per barrel, making it in their self-interest to step in. Indeed, futures markets allow those who act now to lock in a price of $30 for delivery in the fall. Not a bad deal for those who can help! No other economic system could draw in all the available information on such a desperate situation and dispatch incentives to all available parties to correct the immediate problem so promptly.
The role of prices in capturing all the relevant information and coordinating production and distribution is discussed in Chapter 2 of Capitalism versus Socialism: What Does the Bible Have to Say? That chapter deals with capitalist (market-based) economies.