The relationship between geopolitical tensions and energy markets remains central to policy discussions. Russia’s invasion of Ukraine in February 2022, for example, pushed Brent crude prices above $100 per barrel for the first time since 2014. More recently, tensions in the Middle East have renewed concerns about potential disruptions to oil shipments through the Strait of Hormuz, a critical chokepoint for global energy trade. These episodes are part of a broader historical pattern in which geopolitical events generate substantial oil price volatility. The 1990–1991 Gulf War, the Libyan civil war in 2011, and the 2019 attacks on Saudi Aramco facilities all led to pronounced movements in oil prices (Figure 1).
Figure 1 Oil price volatility around periods of high geopolitical risk
Note: The nine major episodes characterised by sharp increases in geopolitical risk are identified: Iraq’s invasion of Kuwait in August 1990; the start of the Gulf War in January 1991; the terrorist attacks in the United States in September 2001; the oil strike in Venezuela in December 2002; the start of the civil war in Libya in February 2011; the breakdown of OPEC during cooperation the escalation of conflicts in Ukraine and Syria in November 2014; the drone attacks on Saudi Arabia’s oil facilities in September 2019; Russia’s invasion of Ukraine in February 2022; and the outbreak of conflict in the Middle East following attacks on Israel in October 2023.
An important body of research has examined the macroeconomic consequences of oil price fluctuations (Caldara and Iacoviello 2019, Baumeister and Hamilton 2019, Kilian and Murphy 2012, 2014, Kilian 2009). Recent contributions provide comprehensive analyses on the relationship between geopolitical developments and oil price fluctuations (Baumeister and Hamilton 2023, Baumeister 2023, Bondarenko et al. 2024, Kilian et al 2024). Pinchetti (2024) recently highlighted that oil price dynamics during periods of heightened geopolitical risk differ meaningfully from those arising in calmer times, motivating sharper identification strategies.
A key question remains insufficiently understood: do oil price fluctuations triggered by, or occurring around, periods of heightened geopolitical tensions behave differently from other oil price shocks, both within the oil market and in their broader macroeconomic effects? This question is central for governments, central banks, and international institutions, which must repeatedly assess how severe, persistent, and economically damaging oil price spikes driven by geopolitical events are likely to be.
In our paper (Verduzco-Bustos and Zanetti 2026), we disentangle the fluctuations of oil prices around periods of heightened geopolitical risk and use it to study its systematic impact on the global oil market, key US macroeconomic aggregates, and cross-border spillover effects on other commodity markets, output, and inflation. We show that oil price movements associated with geopolitical risk have distinct dynamics and macroeconomic consequences, driven in part by forward-looking behaviour and heightened uncertainty.
A new instrument for geopolitical oil price shocks
Our identification strategy is based on the observation that oil prices respond almost immediately to geopolitical news, often before any physical disruption in supply occurs. To capture this effect, we combine high-frequency data on geopolitical risk with movements in oil future prices.
Specifically, we use the threats component of the Geopolitical Risk (GPR) Index developed by Caldara and Iacoviello (2022). We then focus on days when this index increases sharply – by more than 200%, corresponding to roughly two standard deviations above its average growth rate. These episodes capture sudden and unexpected escalations in geopolitical tensions.
Motivated by the ideas in Kanzig (2021), we construct a series of oil price surprises by measuring changes in oil futures prices on these rising geopolitical risk days. This series – aggregated to the monthly frequency – serves as an external instrument within a proxy vector autoregression (VAR) framework, allowing us to identify the effects of geopolitical oil price shocks. By focusing on large spikes in geopolitical tensions, our approach captures anticipatory effects: markets respond not only to realised geopolitical developments, but also to the risk of future events such as wars, conflicts, supply interruptions, and other market disturbances. This forward-looking dimension is central to understanding the behaviour of oil prices during periods of heightened geopolitical uncertainty.
What makes geopolitical oil price shocks different
Our results highlight several features that distinguish geopolitical oil price shocks from standard oil market disturbances (Figure 2).
Figure 2 Impulse responses benchmark model
Note: Impulse response functions normalized to increase oil prices by 10% on impact. The black line shows the median impulse response. Dark (light) blue shaded areas show the 68% (90%) confidence interval computed with five thousand bootstrap replications.
First, these shocks resemble severe supply disruptions, leading to declines in oil production and increases in prices. In the short run, oil inventories fall as they are used to offset reduced supply. However, this pattern differs from that of conventional supply shocks. After the initial decline, inventories rise and remain elevated over time, reflecting precautionary stockpiling. This behaviour is driven by uncertainty: market participants initially draw down inventories to cushion the impact of the shock, but subsequently rebuild them in anticipation of further disruptions. As a result, inventory dynamics exhibit a persistent accumulation phase that is absent in standard supply-driven episodes.
Second, the macroeconomic transmission of these shocks follows a distinct temporal pattern. Global industrial production does not decline immediately after the shock, partly because inventory adjustments and temporary income gains in oil-exporting economies mitigate the initial impact. Over time, however, economic activity weakens, with output falling by up to 3% in the medium run. In the US, industrial production also declines with a delay, while inflation rises rapidly as higher oil prices increase production costs. This prompts an initial tightening of monetary conditions, which is later reversed as the slowdown in economic activity leads to a decline in interest rates.1
Third, the magnitude of price responses is particularly large. A 1% decline in oil production associated with a geopolitical shock corresponds to an increase in oil prices of approximately 11.5%. This response is substantially larger than estimates reported in earlier studies, which typically find more muted effects. The difference reflects the nature of our identification strategy: by focusing specifically on periods of intense geopolitical tensions, we isolate shocks that are accompanied by heightened uncertainty and strong forward-looking responses, leading to more pronounced price movements.
Spillovers to commodity markets and economic activity and inflation across countries
The effects of geopolitical oil price shocks extend beyond the oil market and the US economy, generating significant spillovers across other commodities and countries.
In commodity markets, the impact is broad-based but varies according to oil intensity, aligned with previous findings in the literature (Baffes 2007, Hasanli 2024, World Bank 2016, 2024). A 10% increase in oil prices driven by geopolitical shocks raises the overall commodity price index by around 6.5%. Natural gas prices increase by about 7%, while fertilizer prices rise by roughly 5.4%. Other commodities, including food, raw materials, and precious metals, also experience price increases, though to a lesser extent. These responses reflect the central role of oil as both a production input and a transportation cost, which transmits shocks across supply chains (Figure 3).
Figure 3 Responses of commodity prices to geopolitical oil price shocks
Note: Bars show the largest temporal price deviation across commodity markets after 10% increase in oil prices produced by a geopolitical oil price shock. Red whiskers indicate one-standard confidence bands.
Across countries, the macroeconomic effects are similarly widespread. On average, a 10% increase in oil prices reduces industrial production in OECD economies by about 0.5% and raises consumer prices by approximately 0.3% (Figures 4 and 5). Notably, the results reveal no clear distinction between winners and losers. While oil-exporting countries may initially benefit from higher prices, these gains are offset by increased uncertainty and disruptions to global trade and financial conditions. As a result, output declines in both oil-importing and oil-exporting economies over the medium term, while inflation rises in both groups.
Figure 4 Responses of industrial production across countries to geopolitical oil price shocks
Note: Bars show the strongest response of industrial production across country groups after 10% increase in oil prices produced by a geopolitical oil price shock. The 23 countries considered are Austria, Canada, Colombia, Czechia, Denmark, Estonia, Finland, France, Germany, India, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Norway, Portugal, Romania, Spain, Sweden, Türkiye, United Kingdom.
Figure 5 Responses of consumer prices across countries to geopolitical oil price shocks
Note: Bars show the strongest response of consumer prices across country groups after 10% increase in oil prices produced by a geopolitical oil price shock. The 23 countries considered are Austria, Canada, Colombia, Czechia, Denmark, Estonia, Finland, France, Germany, India, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Norway, Portugal, Romania, Spain, Sweden, Türkiye, United Kingdom.
These findings suggest that geopolitical oil price shocks impose broad-based costs on the global economy. Rather than redistributing income in a way that benefits certain countries, they tend to amplify economic fragility and reduce overall activity.
Conclusions
Geopolitical oil price shocks differ systematically from those observed during normal market conditions. They combine elements of traditional supply disruptions with heightened uncertainty and forward-looking behaviour, leading to distinct dynamics in both the oil market and the broader economy. These episodes are characterized by sharp price increases, declines in production, and a persistent buildup of inventories driven by precautionary motives.
From a policy perspective, these findings underscore the importance of distinguishing between different types of oil price shocks. Geopolitically driven shocks are not only more volatile, but also more persistent and economically damaging than other disturbances. Understanding their unique features is therefore essential for designing appropriate policy responses in an increasingly uncertain global environment.
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