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: This paper studies the general equilibrium effects of time-varying geopolitical risk in the oil market by simultaneously modeling downside risk from disasters, oil storage and the endogenous determination of oil price and macroeconomic uncertainty in the global economy. Notwithstanding the attention geopolitical events in oil markets have attracted, we find that geopolitical oil price risk is not a major driver of global macroeconomic fluctuations. Even when allowing for the possibility of an unprecedented 20 percent drop in global oil production, it takes a large increase in the probability of such a disaster to cause a sizable recessionary impact.

Keywords: geopolitical risk; macroeconomic risk; time-varying uncertainty; rare disasters; oil; endogeneity; shock propagation; economic fluctuations; precautionary savings; inventories (search for similar items in EconPapers)
JEL-codes: E13 E22 E32 Q43 (search for similar items in EconPapers)
Pages: 58
Date: 2024-05-28, Revised 2024-11-12
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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/wp2403r1

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