Geopolitical risk

Geopolitical Oil Price Risk and The US-Israel-Iran War

Work-in-Progress

Abstract

This paper examines how geopolitical oil supply shocks associated with the US–Israel–Iran conflict transmits to the U.S. economy and what they imply for economic policy. We show that Middle East oil disruptions affect the economy through two channels: a direct geopolitical risk channel that weakens investor confidence and financial conditions, and an indirect energy price channel that feeds into real activity. The results indicate that adverse shocks raise oil-related geopolitical risk, lower equity prices, and, with a lag, reduce real disposable income, consumption, and industrial production, while keeping interest rates elevated. Scenario-based oil price forecasts suggest that a prolonged conflict could generate stagflationary pressures, complicating the trade-off between inflation stabilization and support for growth. These findings underscore the policy importance of energy security, supply-chain resilience, and credible monetary policy in an environment of heightened geopolitical uncertainty.