Forecasting Optimal Oil Trade Flows with Quantified Geopolitical Risk in the Belt and Road Initiative

Abstract

In 2013, China announced the Belt and Road Initiative (BRI), a massive infrastructure development plan to connect over a hundred countries to promote economic growth and development. Among the countries who have officially signed a Memorandum of Understanding (MoU) with China include the Russian Federation and Ukraine. However, in 2022, these two countries signed together under the Belt and Road Initiative entered into war. This incident highlights the geopolitical risk inherent to the BRI, and invites further research to consider the risks related to such a global investment project. As China onboards partner countries with cooperation agreements and MoUs which are non-legally binding instruments, the realization of the BRI project under dynamic geopolitical risk is uncertain. The goal of this thesis is to investigate the role of geopolitical risk in the transportation routes of the Belt and Road Initiative by quantifying geopolitical risk within inland and maritime trade routes. To achieve this, oil trade routes along BRI economic corridors are identified, and the optimal flow of oil is forecasted using spatial interaction modeling. The geopolitical risk of associated countries serve as the resistance parameters in the spatial model, and are forecasted using the time series forecasting ARIMA model. Through forecasting the optimal flow distributions of oil for each case scenario identified, this thesis finds that geopolitical risk does affect the optimal flow distribution along trade routes, but that the logistic costs for a route can unexpectedly lead to greater allocation of flows through logistic routes identified as high risk.