Natural resources commodity prices volatility and economic uncertainty: Evaluating the role of oil and gas rents in COVID-19

Highlights

• Natural resource price volatility and economic policy is tested in the US.

• Wavelet power spectrum and wavelet coherence method are used for empirical testing.

• All the variables are found vulnerable across the selected time period.

• Bidirectional causal relation is found between economic policy and other variables.

• Crude oil significantly causes economic policy after Covid-19 pandemic outbreak.

Abstract

Indeed, natural resources are the most tradable goods across the globe and are responsible for running the industrial sector of each country. However, with the recent outbreak of Covid-19, the demand and supply chain of natural resources is greatly influence and causes economic recession, which needs to be addressed. The Covid-19 pandemic increases uncertainty in the global economic policy and natural resource commodity prices. Although the literature provides empirical outcomes in the pre-Covid-19 period, still the influence in the Covid-19 remained unexplored and needs further research. In this regard, the current study examined the US natural resources commodity price volatility and global economic uncertainty while utilizing the monthly dataset from November 01, 2007, to May 01, 2021. Using the wavelet power spectrum and wavelet coherence approaches, the empirical findings of the wavelet power spectrum reveal volatilities in the global economic policy uncertainty and crude oil price in the short run. In contrast, the oil rent, natural gas rents and total natural resources show long-run vulnerabilities. Additionally, the wavelet coherence unveils bidirectional causal association global economic policy uncertainty and other variables. However, the causal influence of global economic performance is found higher than the others. Besides, the crude oil prices and oil rents are associated with global economic policy uncertainty after the Covid-19 pandemic. These findings could have essential economic and energy implications for governors, policymakers, and researchers.

Introduction

In addition, the recent outbreak of the Covid-19 pandemic has negatively influenced the whole economy, but severely impacted the natural resource oil industry in the least of two ways: firstly, the Covid-19 caused a demand shock by reducing global crude oil demand, increasing uncertainty, and triggering a severe economic downturn in most advanced and emerging economies. Secondly, the Covid-19 pandemic caused a war on oil trade between the main oil-producing economies such as Russia and Saudi Arabia, resulting in a supply shock. Hence, the oil price volatility was quite high due to both these shocks (Bourghelle et al., 2021). The emergence of the novel Covid-19 pandemic and the current oil price decline has severely hit the US economy. The intersection of such two issues will almost certainly trigger a long-term economic recession, pushing the US economy into another depression. The Covid-19 epidemic continues to spread rapidly in the United States, producing enormous stock price volatility and economic policy uncertainty, with current stock fluctuation measures surpassing or exceeding those seen in October 1987, December 2008 global financial crisis, and the 1929 stock market crash (Sharif et al., 2020). In addition, the oil market's stability is based on producers' ability to fulfil rising demand. Furthermore, demand dynamics originating from price fluctuations and other external variables associated with oil stakeholders are quickly responded to by the oil market.

Global economic policy uncertainty has a substantial external impact on crude oil price volatility since it is a dominant determinant of numerous events (Yang, 2019). On the one hand, economic policy uncertainty has a commodities market influence on crude oil price fluctuations. Different commodities market players will evaluate the impact of different policy uncertainties according to their own cost-effectiveness while making decisions. Because crude oil is the most basic commodity and plays such an essential role in the whole industrial sector, every choice made by commodities market players will influence the crude oil price to change. As a result, economic policy uncertainty influences the price of crude oil through influencing the behavior of commodities market decision-makers (Wang et al., 2014; Fernández-Villaverde et al., 2011; Kang and Ratti., 2015). On the other hand, economic policy uncertainty has a financial market impact on crude oil price fluctuations. Crude oil possesses both financial and commodity characteristics. When dealing with uncertainty in economic policy, commodities market players would hedge crude oil to lessen the crude oil impact on their own consumption or production. In this regard, crude oil prices change to some extent during the hedging procedure. Aside from commodities market players hedging crude oil, financial market speculators apply distinctive times or regions' marketplaces to undertake cross-market and cross-regional oil speculative trades of crude oil. Economic policy uncertainty is a significant element that influences decision-making of the speculators in different oil speculative operations. Thus, economic policy uncertainty is crucial in estimating crude oil price volatility.

Besides the crude oil price volatility, other factors of natural resources, including oil rents, natural gas rents and total natural resource rents, have also been influenced by both the terms, i.e., economic policy uncertainty and Covid-19 pandemic (Shahzad et al., 2021). Recently, all the governments across the globe are busy making policies regarding the controlling of adverse Covid-19 pandemic effects on both human lives and the economy. Most of the governors compare the global financial crisis to the novel Covid-19 crisis. All the government measures and constraints are being taken in response to the Covid-19 pandemic channel. As a result, Harvey (2020) distinguishes the global financial crisis and the COVID-19 crisis, referring to the coming pandemic catastrophe as the “Great Compression.” Thus, it is the need of an hour to empirically analyze the influence of global economic policy uncertainty on the natural resource commodity price volatility comparatively in both the pre and post Covid-19 pandemic periods.

The objective of current study is to empirically analyze the influence of global economic policy uncertainty on the natural resource commodity price volatility in both pre and post Covid-19 pandemics. However, the sub-objective of this study is to investigate the contributing factors of natural resources, that is crude oil price volatility, oil rents, natural gas rents, and total natural resources rents, in response to the global economic policy uncertainty in the Covid-19. Additionally, this paper also investigates the volatility of each discussed variable and the time-frequency domain of these natural resource instruments with global economic policy uncertainty. This paper contributes to the existence by three folds. Firstly, it is one of the pioneering studies investigating the maximum possible natural resources commodity price volatility and global economic policy uncertainty in the case of the US. Secondly, this research study examined both the pre and post Covid-19 pandemic periods to distinguish the specific causal influence of each variable before and after the Covid-19. Moreover, to the best of our knowledge, there is no specific study available that covers all these variables while considering Covid-19 in the case of the US. As a result, we used the novel wavelet approach to identify the causal association among the under-discussion variables.

This study is novel and contributes to the existing study by three-folds: firstly, it is among the first studies that provides empirical estimates regarding various natural resources and economic uncertainty particularly in the pre- and post-Covid-19 pandemic periods. Nonetheless, number of studies have investigated oil prices in the pre or post Covid-19 pandemic periods (see Sharif et al., 2020; Bakas and Triantafyllou, 2020; Albulescu, 2020; Gil-Alana and Monge, 2020; Guan et al., 2021; Hau et al., 2020; Alaali, 2020; Chatziantoniou et al., 2020; Lyu et al., 2021; Dogan et al., 2021). However, this study is intended to study both the pandemic periods. Secondly, the literature displays many studies that investigates the nexus of natural resources and economic policy uncertainty. Still, the causal nexus of natural resources commodity price volatility and economic uncertainty is missing, which is a prominent contribution of current study to the existing literature. Lastly, this study provides innovative policy insights and recommendations that are beneficial for the policymakers, governors, and academic scholars.

The remaining of the paper is organized as follows: Section-2 covers relevant review of literature for both the pre and post pandemic periods; Section-3 provides the methodology used in the current paper; Section-4 represents empirical results and their respective discussion, lastly; Section-5 provides concluding remarks and policy implications based on the empirical findings.