Is Geopolitical Turmoil Driving Petroleum Prices and Financial Liquidity Relationship? Wavelet-Based Evidence from Middle-East

• Published in: Defence and peace economics 2023-08, Vol.34 (6), p.810-826
• Main Authors: Xie, Huiqiang, Khurshid, Adnan, Rauf, Abdur, Khan, Khalid, Calin, Adrian Cantemir
• Format: Article
• Language: English
• Subjects: Crude oil; Dependency; Economic activity; Economic analysis; Equilibrium; financial liquidity; Geopolitical risk; Geopolitics; Impact analysis; International relations; Liquidity; Mitigation; monetary equilibrium model; oil prices; Petroleum; Political factors; Prices; Regional development; Regional economics; Regions; Uncertainty; Wavelet analysis
• ISSN: 1024-2694; 1476-8267
• DOI: 10.1080/10242694.2022.2039525

The Iran-Saudi Arabia conflict is an ongoing struggle for influence in the region that has created uncertainty, affected oil prices and regional economics. This paper uses wavelet analysis to examine the frequency and time-varying co-movement and casual nexus between petroleum prices (OP) and financial liquidness (MS) with and without geopolitical risk (GPR). The aim is to test the validity of the monetary equilibrium model from 1988 to 2019. The model is supported by the findings, as both short and medium-term association is found between OP and MS at high frequencies in the presence of GPR. We find a medium-term association between OP and MS in the absence of GPR. The paper's overall conclusion suggests that GPR affects OP and OP, in turn, impact MS. Diversifying economic activities to minimize oil dependency, which is sensitive to external shocks, is suggested as a mitigation solution.