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/wp2403

Working Paper

Geopolitical Oil Price Risk and Economic Fluctuations

Abstract: This paper seeks to understand the general equilibrium effects of time-varying geopolitical risk in oil markets. Answering this question requires simultaneously modeling several features including macroeconomic disasters and geopolitically driven oil production disasters, oil storage and precautionary savings, and the endogenous determination of uncertainty about output and the price of oil. We find that oil price uncertainty tends to be driven by macroeconomic uncertainty. Shifts in the probability of a geopolitically driven major oil supply disruption have meaningful effects on the price of oil and the macro economy, but the resulting oil price uncertainty is not a major driver of fluctuations in macroeconomic aggregates.

Keywords: geopolitical risk; macroeconomic risk; time-varying uncertainty; rare disasters; oil; endogeneity; shock propagation; economic fluctuations; precautionary savings; inventories;

JEL Classification: E13; E22; E32; Q43;

https://doi.org/10.24149/wp2403