Is Geopolitical Turmoil Driving Petroleum Prices and Financial Liquidity Relationship? Wavelet-Based Evidence from Middle-East

ABSTRACT

The Iran-Saudi Arabia conflict is an ongoing struggle for influence in the region that has created uncertainty, affected oil prices and regional economics. This paper uses wavelet analysis to examine the frequency and time-varying co-movement and casual nexus between petroleum prices (OP) and financial liquidness (MS) with and without geopolitical risk (GPR). The aim is to test the validity of the monetary equilibrium model from 1988 to 2019. The model is supported by the findings, as both short and medium-term association is found between OP and MS at high frequencies in the presence of GPR. We find a medium-term association between OP and MS in the absence of GPR. The paper’s overall conclusion suggests that GPR affects OP and OP, in turn, impact MS. Diversifying economic activities to minimize oil dependency, which is sensitive to external shocks, is suggested as a mitigation solution.

KEYWORDS:

• Geopolitical risk
• oil prices
• financial liquidity
• monetary equilibrium model
• wavelet analysis

JEL CLASSIFICATION:

• G15
• G33
• F31

Acknowledgments

We want to thank the editor and the anonymous reviewer for their consideration and valuable comments. The comments and suggestions helped improve the paper’s quality and make it more reader-friendly. The usual disclaimer applies.

Disclosure Statement

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