Lies, damn lies, correlation and causation

Despite the evidence to the contrary, conservative pundit Larry Kudlow credits a press availability by President Bush with a drop in the price of oil.

Published July 15, 2008 11:44PM (EDT)

On Tuesday morning, as I was watching President Bush slam Congressional Democrats for not following his lead and moving to overturn the federal ban on offshore drilling, a friend mentioned to me that oil prices were dropping. That got me thinking: will a Bush supporter actually try to claim that Bush's words alone were sufficient to cause the decline in price?

I shouldn't have wondered -- Larry Kudlow never lets me down. Writing on the Corner, a National Review group blog, the conservative pundit opined:

In a dramatic move yesterday President Bush removed the executive-branch moratorium on offshore drilling. Today, at a news conference, Bush repeated his new position, and slammed the Democratic Congress for not removing the congressional moratorium on the Outer Continental Shelf and elsewhere. Crude-oil futures for August delivery plunged $9.26, or 6.3 percent, almost immediately as Bush was speaking, bringing the barrel price down to $136.

Now isn't this interesting? ...

Traders took a look at a feisty and aggressive George Bush and started selling the market well before a single new drop of oil has been lifted. What does this tell us? Well, if Congress moves to seal the deal, oil prices will probably keep on falling. That's the way traders work. They discount the future. Psychology and expectations can turn on a dime...

So I repeat: Drill, drill, drill. Deregulate, decontrol, and unleash the American energy industry. Those hated traders will then keep selling oil as the laws of supply and demand and free markets keep working.

Bravo for Bush. Bravo for the traders.

First, a word about those traders. If any of them have done a modicum of research -- and before fooling with their investors' money, they will have -- they'll know that they'd be pretty foolish to start selling now based on the assumption that drilling might soon be allowed off the U.S. coast. There's no guarantee that the Democrats will go along with Bush; the Congressional ban expires on September 30th, but it can be renewed. And though Democrats obviously have an uncanny ability to cave on a dime, they still control Congress and their presidential candidate still opposes drilling.

Moreover, even if the ban is lifted, any effects on the price of oil won't be felt for quite some time, and even then they'll be "insignificant." The only party-poopers Kudlow could think to cite in his post are Democrats, but there isn't a partisan divide here. This is what the Department of Energy's Energy Information Administration said in 2007, based on an analysis that assumed the expiration of moratoria on leasing of offshore areas would happen as it was scheduled to, in 2012:

[A]ccess to the Pacific, Atlantic, and eastern Gulf regions would not have a significant impact on domestic crude oil and natural gas production or prices before 2030... Because oil prices are determined on the international market, however, any impact on average wellhead prices is expected to be insignificant.

Beyond that, Kudlow's argument was a classic example of confusing correlation with causation. Put simply, just because the drop in price happened as Bush was speaking doesn't mean Bush's words caused the drop. In this case, in fact, we actually have some far more plausible explanations for what caused the price of oil to fall. As my colleague Andrew Leonard explained there's one major event that has been accepted as the causative factor: On Tuesday, OPEC released a report that predicts a slowing in the growth of demand for oil.

The Associated Press added one other factor: speculators' fear that they'll be left holding the bag if a recession leads to a drop in price, or if banks are forced to get some quick cash. The AP quotes a research note by Olivier Jakob, an analyst at Petromatrix in Switzerland, that says, "Since investment banks have been increasing their ... exposure to commodities, their current distress can have (a) significant impact on oil prices if they are forced to liquidate commodity positions in a run for cash."

By Alex Koppelman

Alex Koppelman is a staff writer for Salon.

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