Global uncertainties, geopolitical risks and price exuberance: Evidence from international energy market

Abstract

The interaction of global uncertainty and geopolitical risks with energy price fluctuations has remained a critical global issue. This interaction can impact several regions' macroeconomic performance and welfare by making fundamental energy price forecasting more difficult, which may lead to exuberant behaviour. To help producers, consumers, and regulators make informed decisions in the face of volatile and uncertain energy markets, it is critical to highlight how these uncertainties influence price exuberance. In this light, this study examines the impact of global uncertainty and geopolitical risks on international energy price exuberance using monthly data from January 1990 to October 2022. The study employs supremum augmented Dickey–Fuller (SADF) and generalised augmented Dickey–Fuller (GSADF) tests to identify energy price exuberance. Firstly, consistent with exuberant behaviour, the tests identify seven episodes of explosive behaviour in the international energy prices within the sample. Secondly, this study applies the Logit model to estimate the impact of global uncertainty and geopolitical risks on price exuberance. The estimates suggest that the heightening of global uncertainty may deflate the price exuberance. This study also observes that adverse geopolitical risks (threats and acts) in the world and Ukraine amplify the likelihood of price exuberance in the market. However, adverse geopolitical risk (GPR) in Russia negatively impacted the formation of price exuberance. This finding implies that policymakers can use global uncertainty and geopolitical risks as early warning indicators of probable price exuberance in the international energy market. The findings also indicate the need for a buffer system and safe passage for the flow of energy supply in a geopolitical conflict or a major global event. The study further shows the need for a coordinated effort in innovation, research, and development to enhance energy efficiency and minimise reliance on fossil fuels, which these uncertainties may not significantly influence.