What is Geopolitical Risk Premium?

Geopolitical risk premium is the additional cost or price increase in commodities like oil due to political tensions or conflicts in key producing regions.

Why It Matters for Indonesian Investors

Indonesian investors need to understand geopolitical risk premium because it can impact fuel prices and inflation in Indonesia, affecting various sectors from transportation to consumer goods. Rising oil prices due to geopolitical tensions can also influence the country's import bill and currency value.

How It Works

• Political instability in oil-producing regions (like the Middle East) creates uncertainty about supply.
• This uncertainty leads to higher oil prices as traders factor in the risk of supply disruptions.
• The increased price is not just based on current supply and demand but on the potential for future disruptions.

Real-World Example

Example: In January 2026, tensions flared between Iran and neighboring countries, causing oil prices to rise by $5 per barrel due to fears of potential supply disruptions. This increase added to Indonesia's fuel import costs, potentially leading to higher fuel prices domestically.

Related Terms

• Oil Price Shock - A sudden change in oil prices due to geopolitical events or supply chain disruptions.
• Commodity Market - A market where raw materials like oil, gold, and agricultural products are traded.
• Inflation - A general increase in prices and fall in the purchasing value of money, which can be influenced by changes in oil prices.