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Geopolitical Turning Points and Oil Price Responses: An IV-LP Approach

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  • Saadaoui, Jamel

Abstract

This paper introduces a novel identification strategy of geopolitical turning points, defined as sharp, unanticipated inflection points in bilateral relations. These shocks are measured using the second difference of the Political Relationship Index (Δ²PRI), an event-based monthly index derived from Chinese sources. Unlike standard geopolitical risk indices, Δ²PRI isolates events that represent exogenous shifts in diplomatic relationships. Using quantile IV-local projections, the paper studies the causal and asymmetric impact of these shocks on global oil prices. An improvement in US–China relations reduces oil prices by 0.2% in the short run and raises them by 0.3% in the medium run, with effects varying across the oil price distribution. The extension to the Japan–China dyad supports external validity. The Δ²PRI instrument offers a reusable framework for analyzing bilateral political shocks across various macroeconomic outcomes, making a methodological contribution to the international economics literature.

Suggested Citation

  • Saadaoui, Jamel, 2025. "Geopolitical Turning Points and Oil Price Responses: An IV-LP Approach," MPRA Paper 125586, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:125586
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    References listed on IDEAS

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    Cited by:

    1. Jamel Saadaoui & Russell Smyth & Joaquin Vespignani & Yitian Wang, 2025. "Critical Minerals in an Age of Geopolitical Rivalry: Stockpiling, Refining Constraints, and the Limits of Friend-Shoring," CAMA Working Papers 2025-72, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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    Keywords

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    JEL classification:

    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • 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
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions

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