What does energy price uncertainty reveal about the global energy crisis?

Abstract

We construct a Google search-based measure of energy price uncertainty (ENPU) that reflects oil, coal and natural gas price uncertainty. Using this index, we analyse the evolution of energy price uncertainty stemming from the first truly global energy crisis and we model its impact on global stock markets. The ENPU measure reflects uncertainty beyond that quantified by the Oil Volatility Index (OVX) and that associated with oil price shocks alone, confirming that the global energy crisis is driven by natural gas and coal price shocks. Stock markets are most responsive to ENPU during the period coinciding with the invasion of Ukraine whereas ENPU peaks around the sabotage of the Nord Stream pipelines. We interpret this asynchrony as evidence of markets adapting to the crisis, yielding insight into how economic agents process information. The limited impact of energy prices on returns, which we attribute to the supply-side nature of the crisis, suggests that the uncertainty transmission channel captures aspects of the crisis beyond energy price shocks alone. The impact of ENPU on global markets began declining from October 2022, suggesting that government interventions were at least partially effective. The insights and methodology expounded in this study will be of potential interest to market analysts, investors, policymakers and economists.

HIGHLIGHTS • We construct a Google-based energy price uncertainty (ENPU) index encompassing oil, coal and natural gas price uncertainty. • We use ENPU to model the evolution of the global energy crisis and its impact on global stock markets. • ENPU outperforms the OVX in approximating the VIX and explaining stock returns. • There is an asynchrony in the global stock market response to ENPU and uncertainty peaking. • Coal and natural gas price shocks contribute more to ENPU than oil price shocks. • Energy prices alone weakly impact on returns, suggesting that ENPU reflects a broader transmission channel. • ENPU declines with falling energy prices and policy responses aimed at limiting the impact of high energy prices.