Defending global oil price security: Based on the perspective of uncertainty risk

Abstract

This study uses the time-varying parameter/stochastic volatility vector autoregression (TVP-SV-VAR) model to explore the impact of uncertainty risk on oil prices. Economic policy uncertainty and geopolitical risk were used as proxy variables for economic and political uncertainty risk. The study results indicate that oil price is driven jointly by two uncertain risk factors, where the impact of economic policy uncertainty is significantly greater than that of geopolitical risks. However, with the use of oil futures hedging tools and the improvement of the oil market mechanism, the relationship between oil supply and demand is relatively stable, and their impact on oil prices is gradually weakening. We also investigated the influence of severe political and economic uncertainty event shocks on oil price. The differences in oil prices due to economic or political events are mainly reflected through oil demand channels. The global financial crisis and 9/11 terrorist attacks had higher negative impacts on oil demand and prices than other events. This study discusses the impact of uncertain risk on oil prices and can aid market participants and government decision-makers in accurately predicting the trend of oil price and improving risk response abilities to cope with oil emergencies.