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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 projection methodologies. Our findings show that improved US-China relationships, as well as higher geopolitical risks, drive up the price of oil. In fact, unexpected shocks in the political relationship index are associated with optimistic expectations of economic activity, whereas unexpected shocks in the geopolitical risk index also reflect fears of supply disruption. Political tensions and geopolitical risks are thus complementary causal drivers of oil prices, the former being linked to consumer expectations and the latter to the prospects of aggregate markets.

Suggested Citation

  • Valérie Mignon & Jamel Saadaoui, 2023. "How Do Political Tensions and Geopolitical Risks Impact Oil Prices?," Working Papers hal-04228303, HAL.
    • Handle: RePEc:hal:wpaper:hal-04228303
    Note: View the original document on HAL open archive server: https://hal.science/hal-04228303
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. 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.
    3. Yilmazkuday, Hakan, 2024. "Geopolitical risk and stock prices," European Journal of Political Economy, Elsevier, vol. 83(C).
    4. 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).
    5. 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.
    6. 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.

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    More about this item

    Keywords

    Oil prices; political relationships; geopolitical risk; China.;
    All these keywords.

    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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