Does Oil Prices Cause Financial Liquidity Crunch? Perspective from Geopolitical Risk

ABSTRACT

This study measures whether oil prices affect financial liquidity (FL) in the Kingdom of Saudi Arabi (KSA). The results indicate a positive association between oil prices (OP) and FL in the medium run. FL led OP in the short run during the global financial recession, when the KSA used foreign reserves to stabilize the impact of low OP. Similarly, geopolitical risk (GR) led OP in the medium term and had a positive influence on FL in the short term, especially during periods of higher uncertainty. The correlation between OP and FL becomes more noticeable in the medium term in the presence of GR. Short-run volatility can exert pressure on foreign reserves, which can be effectively managed by keeping reserves in the national currency. Similarly, economic growth sources other than oil income and a peaceful solution to regional differences can reduce defense spending.

KEYWORDS:

• Financial liquidity
• oil prices
• geopolitical risk
• wavelet analysis

JEL CLASSIFICATION:

• G15
• F31
• G33

Acknowledgments

The useful comments and constructive suggestions by anonymous referees are gratefully acknowledged

Disclosure statement

No potential conflict of interest was reported by the authors.

Supplementary material

Supplemental data for this article can be accessed here.

Notes

1. The KSA has initiated a new growth path aimed for sustainable development with diversification towards non-oil revenue. It is a three-pronged strategy i.e. advancing the economy, increasing employment opportunities and promoting small and medium businesses.

2. The process when a unit is operating below the maximum production level. OPEC has initiated the low spare capacity to limit the member country’s ability to respond the oil demand and price increase.