Did geopolitical risks in supplier countries of fossil fuels lead to reduced domestic energy consumption? Evidence from Europe
Erik Hille, Cian Angerpointner
Abstract
In light of the energy crisis following the Russian invasion of Ukraine, policymakers postulated to lower fossil fuel consumption. Focusing on Europe, we analyze whether domestic energy consumption was reduced in the past because of increased geopolitical risk (GPR) in fossil fuel supplier countries. For this purpose, we adopt an aggregate GPR measure that combines information on GPR in supplier countries with rich bilateral trade data for oil, natural gas, and coal. We estimate the impact of GPR related to fossil fuel imports utilizing an instrumental variable approach and a growth-energy use model. Our results indicate that during the period 2000–2019, increased GPR in coal supplier countries entailed reductions in both coal and total energy consumption. Moreover, economic growth effects on fossil fuel consumption were partly reduced by risks related to coal and natural gas imports. Similarly, if mediated by a high domestic import dependency or government effectiveness, GPR partly lowered the consumption of coal and natural gas. Regarding the energy transition, we find indications of a partial shift from fossil fuels to renewable energy in response to GPR abroad. That is, concurrent to the partial reduction in fossil fuel consumption, GPR in coal supplier countries increased renewable energy consumption. • We analyze energy consumption effects of geopolitical risk in fossil fuel supplier countries. • These risks partly lowered total energy consumption and the use of coal and natural gas. • Geopolitical risk also partly reduced the effects of economic growth on energy use. • Geopolitical risks related to coal imports tended to stimulate renewable energy use. • Government effectiveness and import dependence partly mediated the effects of geopolitical risk.