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Not all geopolitical shocks are alike: Identifying price dynamics in the crude oil market under tensions

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  • Zhang, Zhikai
  • Wang, Yudong
  • Xiao, Jihong
  • Zhang, Yaojie

Abstract

Many studies have investigated the effects of geopolitical risks on oil price dynamics, but few distinguish their impacts by the event categories. In this paper, we employ the structural vector autoregression with time-varying parameters to identify oil price movements in the face of different types of geopolitical shocks. We not only observe differences between shocks from geopolitical threats and realities, but also find that various geopolitical tensions deliver disparate shocks to oil markets. Our results suggest that all kinds of geopolitical shocks, except terror threats, can drive oil prices, but the margins and significance vary over time. Oil supply responds negatively, though not significantly, to all geopolitical shocks, while aggregate demand has heterogeneous responses to war and terror shocks. In addition, war- and terror-related events create far more and longer-lasting uncertainty in oil prices than other geopolitical risks. We also observe heterogeneous impacts of different geopolitical risks on the real economy.

Suggested Citation

  • Zhang, Zhikai & Wang, Yudong & Xiao, Jihong & Zhang, Yaojie, 2023. "Not all geopolitical shocks are alike: Identifying price dynamics in the crude oil market under tensions," Resources Policy, Elsevier, vol. 80(C).
    • Handle: RePEc:eee:jrpoli:v:80:y:2023:i:c:s030142072200681x
    DOI: 10.1016/j.resourpol.2022.103238
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    More about this item

    Keywords

    Geopolitical shocks; Oil price dynamics; War escalation; Terror acts; Oil supply and demand;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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