Oil markets are showing a dangerous level of complacency despite growing geopolitical risks in the Middle East, shrinking petroleum inventories, and significant disruptions to Russian fuel exports, according to economist Steve Hanke.

Speaking with Mario Nawfal on his YouTube show, Hanke argued that current oil prices are failing to reflect mounting risks surrounding the Iran conflict, the Strait of Hormuz, and tightening supplies of refined petroleum products.

He warned that while futures markets remain relatively calm, underlying conditions suggest the world could face significant energy disruptions if hostilities continue.

Hanke, a professor of Applied Economics at Johns Hopkins University, is widely known for his work on inflation, currency crises, monetary policy, and commodity markets.

A former senior economist on President Ronald Reagan's Council of Economic Advisers, he has advised governments around the world and is a frequent commentator on global financial markets.

During the interview, Hanke pointed to a recent Wall Street Journal report warning that U.S. oil inventories have become "dangerously low."

"We know that when inventories are low, the spot price of any commodity exceeds the futures prices," Hanke said, noting that the current pricing structure has changed very little over the past week despite worsening geopolitical developments.

Oil prices have been hovering around $70 per barrel for WTI crude — not far from prices before the recent Iran war began in late February.

"The markets are asleep at the wheel,” he said, adding, “Something is wrong."

One of Hanke's principal concerns is the disruption of global refined fuel supplies stemming from Russia.

According to Hanke, Russia traditionally accounted for roughly 8% to 10% of internationally traded refined petroleum products — including gasoline, diesel fuel, and jet fuel — but Ukrainian strikes have significantly damaged Russian refining capacity.

"Refining capacity has been hit very hard in Russia," Hanke said after speaking with a colleague in Moscow.

He added that even motorists in Moscow are reportedly waiting hours to fill their vehicles because Russia has shifted from exporting refined fuels to importing them.

"Russia's out now," Hanke said of the refined products market. "They're importing refined products. They're not exporting."

That loss, he argued, should be placing far greater upward pressure on international fuel markets.

"If you've got Russia supplying 8 to 10% of gasoline, diesel and jet fuel in the international traded market, and all of a sudden you take 10% out of the market, well, that's not trivial," Hanke said.

Despite these shortages, crude oil prices have remained relatively subdued, something Hanke acknowledged he cannot fully explain.

"It is a little bit of a mystery," he admitted.

Rather than pointing to a single cause, Hanke said numerous competing forces are simultaneously influencing oil prices.

"We have lots of cross currents going on," he said. "You end up with a very difficult situation to start predicting anything."

He also dismissed speculation that oil companies are secretly paying significantly higher physical prices for crude than are reflected in futures markets.

Although refining margins — or "crack spreads" — remain elevated, Hanke said strong profits reported by refiners suggest companies are benefiting from the current market rather than absorbing hidden costs.

"The refineries are making a lot of money," he said, adding that earlier reports of a large disconnect between physical oil prices and paper futures markets have narrowed considerably.

Another reason oil prices have remained restrained, Hanke suggested, is that traders may be looking beyond current disruptions to expectations of increased global oil supplies in 2027.

However, he argued that current futures prices do not fully support that explanation either.

"If everyone is anticipating a lot of surplus in '27, you would end up with a much steeper forward curve and much more backwardation than we actually have," Hanke said.

Beyond energy markets, Hanke expressed deep skepticism that geopolitical tensions in the Middle East will ease anytime soon.

Using what he described as a "joint probability" exercise, Hanke estimated only a very small likelihood that several key developments — including reopening the Strait of Hormuz, disarming Hezbollah, Hamas and the Houthis, and Israeli withdrawals from disputed territories — would all occur simultaneously.

"You're going to end up any way you cut it with a very low percentage — an infinitesimal amount — of one percent probability of things being settled in the region," he said. "There's virtually no chance that things are going to work out and you'll have peace in the region."

Hanke suggested markets have yet to fully recognize those geopolitical realities.

"I think there's tremendous complacency in the markets," he said, extending that concern beyond commodities to stocks and other financial assets.

While Hanke stopped short of forecasting an immediate oil price spike, he cautioned that markets could eventually be "mugged by reality" if military tensions intensify or supply disruptions worsen.

For now, he believes investors are underestimating the cumulative impact of shrinking inventories, lost Russian refining output, and the continuing instability surrounding Iran and the Strait of Hormuz.