Is Oil Political? From the Perspective of Geopolitical Risk

ABSTRACT

This paper investigates the political property of oil from the perspective of geopolitical risk (GPR). We explore the relationship between GPR and oil price (OP) by performing the full-sample and subsample rolling-window bootstrap Granger causality tests. We find that wars will lead to an increase in OP but that low GPR cannot lead to an immediate decline in price. This finding can also be explained by economic crises, which can make OP soar while GPR is low. In turn, the rise in OP has a positive impact on GPR. The oil market has a significant interaction with geopolitical events, which reflects the pattern of global politics, so we can conclude that oil has a political property. In the context of a tense and complex global relationship, the world can benefit from the political property of oil to prevent GPR, which can in turn facilitate an accurate prediction of OP to reduce the adverse effects of large fluctuations in the oil market.

KEYWORDS:

• Geopolitical risk
• Oil price
• Granger causality
• Time-varying

JEL CLASSIFICATION:

• C32
• N40
• Q40

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. To prove the robustness of the test results, we also use a sample size from 1992:M1, 1994:M1 and 1996:M1 to 2018:M4 to explore the Granger causality, and the results are consistent with those for 1990:M1 to 2018:M4.

2. The GPR index is obtained from the Economic Policy Uncertainty Database.

3. The six groups are as follows: Group 1 includes words related to geopolitical risk and military-related tensions. Group 2 includes words related to nuclear tensions. Groups 3 and 4 include words related to wars and terrorist threats, respectively. Groups 5 and 6 include press coverage of actual adverse geopolitical events.

4. The 11 newspapers are as follows: The Boston Globe, Chicago Tribune, The Daily Telegraph, Financial Times, The Globe and Mail, The Guardian, Los Angeles Times, The New York Times, The Times, The Wall Street Journal and The Washington Post.

5. The price of Brent crude oil is obtained from the U.S. Energy Information Administration.

6. To prove the reliability of the test results, we also use the rolling-window widths of 20, 28 and 32 months to explore the Granger causality, and the results are consistent with those for the 24-month rolling window.

7. The ratchet effect, posited by Duesenberry, means that consumers initially tend to increase consumption with a rise in income but that it is not easy to reduce consumption when income decreases. In this paper, it means that OP is unlikely to fall immediately during the rising stage.

8. The JLN index is obtained from https://www.sydneyludvigson.com/data-and-appendixes/.