Geopolitical Risk and World Oil Prices

With events in the world oil market once again taking center stage, how much – in percentage terms – does political risk affect fluctuations in international crude prices?  Which aspect of political risk is most significant? Is there a time lag involved between heightened risk and rising prices? Which OPEC countries’ political risk profile is most determinative of price movements?

This recent work considered these questions, used our ICRG data as a proxy for OPEC’s political risk along with several Structural Vector Autoregression (SVAR) models, and found:

(1) The political risk of OPEC countries does have a significant and positive influence on Brent crude oil prices in the sample period from January 1998 to September 2014, and the most significant positive influences appear in about one and a half year and last about a year. 

(2) The OPEC’s integrated political risk contribute to 17.58% of the oil price fluctuations in the sample period, which is only lesser than that of the oil demand shocks (34.64%). 

(3) Compared with the political risk of OPEC countries in North Africa and South America, the political risk of OPEC countries in Middle East contribute most to the oil price fluctuations. 

(4) Among the eight components of the political risk in OPEC, the internal conflicts contribute most to the oil price fluctuations in the sample period.


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