Fear and Shortages: Identifying Geopolitical Risk and Supply Disruptions in Energy Markets

This paper proposes a new high-frequency structural vector autoregression model that can disentangle the drivers of oil and natural gas prices in real time. In particular, it separately identifies actual supply disruptions from geopolitical-risk shocks that raise expectations of future supply shortfalls. Local projection analysis shows that macroeconomic effects differ across shocks. Oil supply shocks significantly affect aggregate prices and unemployment, usual central banks' policy targets, whereas geopolitical supply risk shocks have only short-lived effects on prices and no effect on unemployment. All gas shocks generate persistent effects on the price level, but muted effects on unemployment. Historical price decompositions using the high-frequency model during the Russia-Ukraine war and the 2026 Middle East war show that energy prices rise due to geopolitical risk before supply disruptions materialize. Even after disruptions occur, fears of additional shortages continue to exert upward pressure on prices. These findings highlight the importance for policymakers to distinguish realized supply disruptions from geopolitical supply risk shocks.