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How Do Political Tensions and Geopolitical Risks Impact Oil Prices?

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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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    1. Cai, Yifei & Mignon, Valérie & Saadaoui, Jamel, 2022. "Not all political relation shocks are alike: Assessing the impacts of US–China tensions on the oil market," Energy Economics, Elsevier, vol. 114(C).
    2. Dario Caldara & Matteo Iacoviello, 2022. "Measuring Geopolitical Risk," American Economic Review, American Economic Association, vol. 112(4), pages 1194-1225, April.
    3. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-1069, June.
    4. Theodosios Perifanis & Athanasios Dagoumas, 2019. "Living in an Era when Market Fundamentals Determine Crude Oil Price," The Energy Journal, International Association for Energy Economics, vol. 0(The New E).
    5. Christiane Baumeister & James D. Hamilton, 2019. "Structural Interpretation of Vector Autoregressions with Incomplete Identification: Revisiting the Role of Oil Supply and Demand Shocks," American Economic Review, American Economic Association, vol. 109(5), pages 1873-1910, May.
    6. Kilian, Lutz, 2019. "Measuring global real economic activity: Do recent critiques hold up to scrutiny?," Economics Letters, Elsevier, vol. 178(C), pages 106-110.
    7. Qin, Yun & Hong, Kairong & Chen, Jinyu & Zhang, Zitao, 2020. "Asymmetric effects of geopolitical risks on energy returns and volatility under different market conditions," Energy Economics, Elsevier, vol. 90(C).
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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: : “doux commerce” or “trade follows the flag”?," Working Papers REM 2023/0301, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    2. Valérie Mignon & António Afonso & Jamel Saadaoui, 2023. "On the time-varying impact of China's bilateral political relations on its trading partners (1960-2022)," EconomiX Working Papers 2023-33, University of Paris Nanterre, EconomiX.
    3. Antonio Afonso & Valérie Mignon & Jamel Saadaoui, 2024. "On the time-varying impact of China’s bilateral political relations on its trading partners: “doux commerce” or “trade follows the flag”?," Working Papers of BETA 2024-17, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.

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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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