Investigating the dynamics of crude oil and clean energy markets in times of geopolitical tensions

Abstract

This study examines how adverse geopolitical events influence the dynamics of crude oil and clean energy markets. A vector smooth transition regression model is implemented to capture the presence of regime shifts due to geopolitical conflicts. The impulse response analyses reveal that the crude oil market is non-responsive to all geopolitical events. A significant spike in oil prices arises only if risks associated with geopolitical tensions surpass a certain threshold level. The green equity market responds differently, showing an adverse reaction during episodes of higher geopolitical uncertainty. Moreover, our empirical results point out a decoupling between traditional and clean energy sectors in times of geopolitical stress. Our findings contrast with the conventional wisdom that a surge in oil prices would foster a shift toward alternative energies. While the observed disconnection would offer better diversification benefits, it is challenging for policymakers to encourage investors to maintain low-carbon portfolios.