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Geopolitical Oil Price Risk and Economic Fluctuations

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Abstract

This paper seeks to understand the general equilibrium effects of time-varying geopolitical risk in oil markets. Answering this question requires simultaneously modeling several features including macroeconomic disasters and geopolitically driven oil production disasters, oil storage and precautionary savings, and the endogenous determination of uncertainty about output and the price of oil. We find that oil price uncertainty tends to be driven by macroeconomic uncertainty. Shifts in the probability of a geopolitically driven major oil supply disruption have meaningful effects on the price of oil and the macro economy, but the resulting oil price uncertainty is not a major driver of fluctuations in macroeconomic aggregates.

Suggested Citation

  • Lutz Kilian & Michael D. Plante & Alexander W. Richter, 2024. "Geopolitical Oil Price Risk and Economic Fluctuations," Working Papers 2403, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddwp:98321
    DOI: 10.24149/wp2403
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    Keywords

    geopolitical risk; macroeconomic risk; time-varying uncertainty; rare disasters; oil; endogeneity; shock propagation; economic fluctuations; precautionary savings; inventories;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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