Energy Markets, Geopolitical Risks, and Global Trade: A High-Stakes Tug of War

Abstract

The ever-evolving energy landscape and rising geopolitical tensions are reshaping global trade like never before. Trade stability faces significant threats, with crude oil, coal, and natural gas prices fluctuating wildly alongside growing geopolitical uncertainties. This study examines the intricate relationship between energy market swings and geopolitical risks, captured through geopolitical risk acts and threats, to uncover their quantile-specific impact on global trade dynamics. Using daily data from December 30, 2016, to January 13, 2025, we apply Multivariate Quantile-on-Quantile Regression and Quantile Regression to dissect how these forces influence trade across different levels. Our findings reveal that crude oil remains the dominant driver of global trade, with its influence intensifying at higher trade quantiles. Meanwhile, coal and natural gas exhibit varying impacts and geopolitical risk acts unexpectedly boost trade in high-quantile scenarios, whereas geopolitical risk threats consistently dampen trade flows. These insights shed light on the dual nature of energy markets and geopolitical risks as catalysts and disruptors of global trade. To navigate these turbulent waters, we advocate for energy diversification, proactive geopolitical risk management, and integrating green energy policies to stabilise trade flows and bolster economic resilience amid growing uncertainties.