Research: Geopolitical Oil Price Shocks More Damaging to the Economy

JAKARTA, KOMPAS.com — Oil price surges due to geopolitical conflicts are assessed to impose greater pressure on the global economy compared to ordinary oil price shocks. These shocks not only trigger inflation and suppress production but also spill over to prices of natural gas, fertilisers, and food commodities. This conclusion emerges from the latest research by the Centre for Economic Policy Research (CEPR) through VoxEU, titled Geopolitical Oil Price Shocks: Why These Shocks Hit Harder, authored by Guillermo Verduzco-Bustos and Francesco Zanetti. “Geopolitical oil price shocks resemble severe oil supply shocks,” write Verduzco-Bustos and Zanetti in the research. The findings challenge the long-held view that general oil price surges primarily impact energy-importing countries significantly, while exporters might benefit. In contrast, the study demonstrates that there are no clear winners from this type of shock. One of the main findings of the research is the extensive transmission of geopolitical conflict-induced oil shocks to global commodity markets. In the CEPR simulation, a 10% rise in oil prices triggered by a geopolitical shock drives the overall commodity price index up by around 6.5%. The largest spillover effect is observed in natural gas prices, which rise by about 7%, while fertiliser prices increase by around 5.4%. According to the CEPR researchers, this pattern reflects oil’s position as both a production input and a transportation cost that affects cross-sector supply chains. “A 10% rise in oil prices triggered by a geopolitical shock will increase the overall commodity price index by around 6.5%,” states CEPR in its research report. This chain reaction is the key differentiator from ordinary oil price shocks, as the pressure does not stop in the energy sector but extends to industrial production costs and consumer goods prices.