Geopolitical risk and uncertainty in energy markets: Evidence from wavelet-based methods

Abstract

In these recent years, geopolitical studies have gained an increasing interest across mainstream arenas as well as among researchers. The pandemic outbreak in 2020 and warfare tensions in many hot spots across the globe are the prime drivers of the attraction of geopolitical studies speculating the “post-globalized” world. Geopolitical (dis)equilibria and energy markets have demonstrated a solid linking due to the interconnected global economy alongside with uncertainty over both climate and global policy. In this paper, we intend to investigate the relationship between the above-mentioned risks and the energy market, with a special focus on natural gas, coal and oil. To this purpose, we apply wavelet entropy-based measures to assess how much uncertainty indices can predict the dynamics of these three commodities and vice-versa. Both indexes and commodities time series are collected over a period that goes from January 2008 to February 2024 for a total of 195 monthly observations. The results show that the commodities are affected very differently by the risk and uncertainty indexes. Hence we believe these findings may be supportive to policy makers and regulators who are called to puzzle out the future energy mix for power generation in times of geopolitical turmoil and climate crisis. We eventually support our findings with a comprehensive dissertation over the most relevant geopolitical phenomena of last years.