The influence of the Ukraine-Russia conflict on renewable and fossil energy price cycles

Abstract

This study investigates the impact of the Ukraine-Russia conflict on energy cycles by extending a business cycle-based approach in the energy sector. We employ the Markov Switching Bayesian Vector Autoregressive (MS-BVAR) model to derive filtered probabilities that represent energy cycles. By utilizing the Russia Economic Policy Uncertainty Index and dummy variables derived from Google search data as conflict indicators, we conduct regression analysis and examine the generalized impulse response function to assess the effects of the conflict on energy cycles. Our research reveals notable differences in renewable and fossil energy price cycles. The renewable price cycle exhibits greater persistence, indicating a limited response to the conflict shock. In contrast, the fossil energy price cycle exhibits more significant and enduring adjustments in high- and low-volatility regimes. These findings highlight the heterogeneous impacts of the Ukraine-Russia conflict on the fossil energy market, indicating potential disruptions in supply chains and market sensitivities. Notably, fossil energy prices demonstrate higher responsiveness to the Ukraine-Russia conflict across market conditions.