Does Oil Prices Cause Financial Liquidity Crunch? Perspective from Geopolitical Risk

Abstract

ABSTRACT This study measures whether oil prices affect financial liquidity (FL) in the Kingdom of Saudi Arabi (KSA). The results indicate a positive association between oil prices (OP) and FL in the medium run. FL led OP in the short run during the global financial recession, when the KSA used foreign reserves to stabilize the impact of low OP. Similarly, geopolitical risk (GR) led OP in the medium term and had a positive influence on FL in the short term, especially during periods of higher uncertainty. The correlation between OP and FL becomes more noticeable in the medium term in the presence of GR. Short-run volatility can exert pressure on foreign reserves, which can be effectively managed by keeping reserves in the national currency. Similarly, economic growth sources other than oil income and a peaceful solution to regional differences can reduce defense spending.