Geopolitical risks, critical materials and energy transition: Insights from wavelet analysis

Abstract

This paper investigates how the prices of selected energy transition-related commodities respond to geopolitical risks, with particular attention to the suitability of a widely used geopolitical risk index in relation to the commodities included in the dataset. From a methodological perspective, the analysis is conducted via a wavelet-based method. The dataset includes natural gas, copper, palladium, and cobalt futures prices, whose time series cover a fourteen-year time span (2010-2024), while geopolitical risk is measured through the well known text-based geopolitical risk (GPR) index by Caldara and Iacoviello. The study is supported by an in-depth geopolitical discussion, analyzing events and dynamics relevant to the current international context. Our investigation shows different degrees of correlation between geopolitical risk and the above-mentioned commodities. From an overall perspective, commodities with a long-standing history of application tend to exhibit a more straightforward connection with geopolitical dynamics. In contrast, those that have recently gained prominence in the energy transition — especially newer entrants — show weaker and less consistent signals. In this respect, despite its widespread use in the literature, we infer that the GPR index has certain limitations when used to explain dynamics affecting rare and critical elements — particularly those sourced from geographical areas that are not regularly covered by mainstream media. The issue of the GPR index’s adequacy in such contexts appears to be largely overlooked in current academic sources. Recognizing that the energy transition is driving a paradigm shift from a geostrategic standpoint requires a critical awareness when employing such indexes. At the same time, it calls for rethinking how risk indexes are designed, so that they better reflect geopolitical phenomena linked to the new centers of gravity emerging from the energy transition. The results are directed towards policymakers and regulators, who are called upon to govern the energy transition with a focus on the availability of critical materials in the coming decades.