Not All Political Relation Shocks are Alike: Assessing the Impacts of Us-China Tensions on the Oil Market

Abstract

This paper assesses the effects of US-China political tensions on the oil market. Relying on a quantitative measure of these relationships, we investigate how their dynamics impact oil demand, supply, and prices over various periods, starting from 1971 to 2019. To this end, we estimate a structural vector autoregressive model as well as local projections and show that political tensions between the two countries pull down oil demand and raise supply at medium- and long-run horizons.
Overall, our findings show that conflicting relationships between these two major players in the oil market may have crucial impacts, such as the development of new strategic partnerships.

Keywords: China, Oil market, Political relations