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How Do Political Tensions and Geopolitical Risks Impact Oil Prices?

Author

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  • Valérie Mignon

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

  • Jamel Saadaoui

Abstract

This paper assesses the effect of US-China political relationships and geopolitical risks on oil prices. To this end, we consider two quantitative measures – the Political Relationship Index (PRI) and the Geopolitical Risk Index (GPR) – and rely on structural VAR and local projections methodologies. We expand the literature on the macroeconomic consequences of geopolitical risks by considering bilateral political relationships. The bilateral GPR does not focus on the relation between the US and China; rather, it provides an overall picture of the geopolitical uncertainty for China on a multilateral basis. Our empirical investigation shows that improved US-China relationships, as well as higher geopolitical risks, drive up the price of oil. Indeed, unexpected shocks in the political relationship index are associated with optimistic expectations about economic activity, whereas unexpected shocks in the geopolitical risk index reflect fears of supply disruption. Political tensions and geopolitical risks are thus complementary causal drivers of oil prices, the former being linked to the demand side and the latter to the supply side.
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  • Valérie Mignon & Jamel Saadaoui, 2023. "How Do Political Tensions and Geopolitical Risks Impact Oil Prices?," Post-Print hal-04436183, HAL.
    • Handle: RePEc:hal:journl:hal-04436183
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    References listed on IDEAS

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    15. 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).
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    Cited by:

    1. António Afonso & José Alves & João Jalles & Sofia Monteiro, 2024. "Energy Price Dynamics in the Face of Uncertainty Shocks and the role of Exchange Rate Regimes: A Global Cross-Country Analysis," Working Papers REM 2024/0344, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    2. Zhang, Xiuqi & Meng, Xiangyu & Su, Chi Wei, 2024. "The security of energy import: Do economic policy uncertainty and geopolitical risk really matter?," Economic Analysis and Policy, Elsevier, vol. 82(C), pages 377-388.
    3. Yilmazkuday, Hakan, 2024. "Geopolitical risk and stock prices," European Journal of Political Economy, Elsevier, vol. 83(C).
    4. António Afonso & Valérie Mignon & Jamel Saadaoui, 2023. "On the time-varying impact of China's bilateral political relations on its trading partners (1960-2022)," Working Papers hal-04330751, HAL.
    5. Afonso, António & Mignon, Valérie & Saadaoui, Jamel, 2024. "On the time-varying impact of China's bilateral political relations on its trading partners: “Doux commerce” or “trade follows the flag”?," China Economic Review, Elsevier, vol. 85(C).
    6. Jamel Saadaoui & Russell Smyth & Joaquin Vespignani, 2024. "Ensuring the security of the clean energy transition: Examining the impact of geopolitical risk on the price of critical minerals," Monash Economics Working Papers 2024-19, Monash University, Department of Economics.

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    Keywords

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    JEL classification:

    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions
    • 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

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