Coincidence or Causation?

Will Collier at Pajamas Media has a fascinating story on gas prices. Oil prices ran up smartly in early 2008 and hit $145.16 a barrel on July 14th that year. But that was the very day that President Bush lifted a ban on off-shore drilling by executive order.

By July 18th, the price had fallen to $128.94–a 12 percent decrease in just four days–short-seller heaven. On August 14th, the price was at $115.05. By December 23rd, the price had collapsed all the way to $30.28.

Could that be a case of post hoc ergo propter hoc, that the executive order and the price collapse had nothing to do with each other? That’s certainly what the left argued. The left said it was really the Great Recession that caused the collapse in oil prices. But Lehman Brothers didn’t fail until September 15th, two months after oil prices had begun their dramatic decline, and oil actually spiked in reaction to Lehman Brothers before resuming its decline. They also argued that off-shore drilling couldn’t add to supply for years–thus revealing a stunning ignorance of how current prices reflect not just current supply and demand but also perceived future supply and demand.

And when did oil prices begin their reassent into the stratosphere? That was in January, 2009, just as Barack Obama was inaugurated, having announced that he would reverse Bush’s order. When he actually did so, on February 8th, 2011, crude was at $85.85 a barrel. Two months later, the price has risen to $112.23 (as of this morning), an increase of 23 percent.

Again, is this post hoc ergo propter hoc, or is the market pricing in perceived future supply? I’m going with the latter.

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Coincidence or Causation?

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