Geopolitical Risks and Energy Uncertainty: Implications for Global and Domestic Energy Prices

Abstract

This paper investigates the interaction between global geopolitical risks and global energy uncertainty by focusing on their implications for global and domestic energy prices of 157 countries. The empirical investigation is based on a structural vector autoregression model covering the monthly sample period between 1996m1-2022m10, where global real economic activity is controlled for. The results show that a unit shock to global geopolitical risk (normalized to one standard deviation) results in about 1.13 units of an increase in global energy uncertainty (normalized to one standard deviation) in the long run (after two years), whereas the corresponding effects on global energy prices are statistically insignificant. In contrast, a unit shock to global energy uncertainty results in about 52% (57%) of a reduction in global energy prices (global economic activity), acting like negative global demand shocks. When statistically significant country-specific results are considered in the long run, a positive shock to the global geopolitical risk affects domestic energy prices positively (negatively) in 10% (10%) of oil producing countries, 32.1% (19.7%) of non-oil producing countries, 47.2% (0%) of advanced economies, 55% (0%) of euro area countries, 25% (22.4%) of emerging markets, and 22.2% (26.7%) of developing countries. In comparison, a positive shock to the global energy uncertainty affects domestic energy prices positively (negatively) in 5% (40%) of oil producing countries, 3.6% (54%) of non-oil producing countries, 0% (61.1%) of advanced economies, 0% (50%) of euro area countries, 3.9% (56.6%) of emerging markets, and 6.7% (37.8%) of developing countries. Important policy implications follow regarding the energy security of countries.

Keywords: Geopolitical Risk, Energy Uncertainty, Energy Prices, Real Economic Activity

JEL Classification: E31, F62, Q41