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Does economic and climate policy uncertainty matter the oil market?

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  • Liu, Fangying
  • Su, Chi Wei
  • Tao, Ran
  • Lobonţ, Oana-Ramona

Abstract

In the context of addressing climate change and promoting the energy transition, economic policy uncertainty (EPU) and climate policy uncertainty (CPU) have become significant factors increasing fluctuations in the oil market. This research investigates whether EPU and CPU exert an influence on the oil market by using the wavelet-based quantile-on-quantile approach. Our findings demonstrate that the effect of EPU and CPU on oil prices (OP) varies across different frequencies. Specifically, high EPU aggravates investors' pessimism sentiment and dampens companies’ willingness to invest in the short run. As a result, the decrease in investment by market participants in oil-related products causes OP to decline. In the medium- and long-horizons, low levels of EPU can stimulate consumer oil consumption and drive OP higher. Moreover, the uncertainty posed by CPU in the short run increases the risk of fossil fuels becoming stranded assets and negatively impacts the stability of the oil market. In the medium to long-term perspective, CPU leads investors to increase their consumption of fossil fuels due to cost-efficiency considerations, thereby positively influencing oil demand. These results can provide decision-making support for governments to formulate effective oil market development strategies and for investors to optimise risk management.

Suggested Citation

  • Liu, Fangying & Su, Chi Wei & Tao, Ran & Lobonţ, Oana-Ramona, 2024. "Does economic and climate policy uncertainty matter the oil market?," Resources Policy, Elsevier, vol. 95(C).
    • Handle: RePEc:eee:jrpoli:v:95:y:2024:i:c:s0301420724005555
    DOI: 10.1016/j.resourpol.2024.105188
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