Research Department Working Papers
Geopolitical Oil Price Risk and Economic Fluctuations
No. 2403 (Revised March 2026)
Abstract: Market participants and policymakers are concerned about major oil production shortfalls driven by geopolitical events. Even when such events never materialize, unanticipated increases in the probability of a production shortfall may generate a surge in the price of oil and oil price uncertainty. We provide the first systematic account of the quantitative importance of time-varying geopolitical risk to oil production for the global economy. We show that a 20 percentage point increase in the probability of a 5% shortfall in oil production causes a 0.12% reduction in output. When considering a 20% shortfall, the drop in output nearly quadruples.
DOI: https://doi.org/10.24149/wp2403r2