Crude oil production in the Persian Gulf amidst geopolitical risk, cost of damage and resources rents: Is there asymmetric inference?

Abstract

The strategic importance of the Strait of Hormuz to the global oil market has been linked with incessant tensions among the oil player states in recent times. As a main contribution to literature, the current study examines crude oil production in the Persian Gulf amidst geopolitical risks. In achieving this objective, the non-linear autoregressive distributed lag (NARDL) approach is employed to examine the impact of geopolitical risk, cost of oil damage, total resources rents and crude oil price on the production of crude oil in the Persian Gulf over the period 1975–2018. The study found that positive shocks in geopolitical risk and cost of damage have statistically significant and dynamic negative impacts on oil production in the short-run. However, negative shock in the dynamic value of crude oil price in the long run and short-run exerts a statistically significant and negative impact on the crude oil production. Additionally, whether there is a positive or a negative shock in the resources rents, it causes a significant positive impact on oil production in the long run. Therefore, the current study offers policy indication that eliminating or reducing regional tension in the Persian Gulf has the potential of minimizing oil flow hindrances in the Strait of Hormuz and other crude oil exploration platforms and transportation channels across the globe.