Geopolitical Oil Price Risk and Economic Fluctuations

RePEc Short ID: ppl48
ORCID iD: 0000-0003-0604-105X

Kilian, Lutz; Plante, Michael D.; Richter, Alexander W.

doi:10.24149/wp2403r2

Working Paper Revision

Geopolitical Oil Price Risk and Economic Fluctuations

Abstract: Market participants and policymakers are concerned about major oil production shortfalls driven by geopolitical events. Even when such events never materialize, unanticipated increases in the probability of a production shortfall may generate a surge in the price of oil and oil price uncertainty. We provide the first systematic account of the quantitative importance of time-varying geopolitical risk to oil production for the global economy. We show that a 20 percentage point increase in the probability of a 5% shortfall in oil production causes a 0.12% reduction in output. When considering a 20% shortfall, the drop in output nearly quadruples.

JEL Classification: E13; E22; E32; Q43;

https://doi.org/10.24149/wp2403r2