Geopolitical Oil Price Risk and Economic Fluctuations

Lutz Kilian, Michael Plante and Alexander Richter

No 2403, Working Papers from Federal Reserve Bank of Dallas

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.

Keywords: geopolitical risk; macroeconomic risk; time-varying uncertainty; rare disasters; oil; endogeneity; probability shocks; economic fluctuations; precautionary savings; inventories (search for similar items in EconPapers)
JEL-codes: E13 E22 E32 Q43 (search for similar items in EconPapers)
Pages: 50
Date: 2024-05-28, Revised 2026-03-02
New Economics Papers: this item is included in nep-ene and nep-rmg
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Citations: View citations in EconPapers (3)

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Working Paper: Geopolitical Oil Price Risk and Economic Fluctuations (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddwp:98321

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DOI: 10.24149/wp2403r2

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