How Big of an Impact Has the Falling Dollar Had on the Price of Oil?

OPEC’s starting to tick me off. First they say they are ‘unhappy’ about high oil prices. Then, reported recently that OPEC’s President is predicting oil to go to $170 per barrel by the end of the year:

OPEC President Chakib Khelil predicted that the price of oil will climb to $170 a barrel before the end of the year, citing the dollar’s decline and political conflicts.

“Oil prices are expected to reach $170 as demand for fuel is growing in the U.S. during the summer period and the dollar continues to weaken against the euro,” Khelil said today in a telephone interview. The leader of the Organization of Petroleum Exporting Countries also serves as Algeria’s oil minister.

I’m skeptical of this assertion because oil is up over 54% so far this year, while the dollar is down about 7.5% against the Euro. Unless I’m not understanding exchange rates, the dollar’s fall can only be attributed to a 7.5% rise in the price of oil. The rest is either due to supply and demand or speculation (though as Meg wrote this morning, that might not be the case). I doubt that the Fed will continue to allow the dollar to fall. I’m also skeptical of Khelil’s claim of rising demand in the U.S. throughout the summer. I bet we’ll see a drop in demand as some people just can’t afford to drive anywhere.

It bugs me when these guys come out and say stuff like this. It almost seems to be a self-fulfilling prophecy.

Oil Speculators Aren’t The Problem

There’s a very interesting Fortune article entitled In Defense of Oil ‘Speculators’ that I recommend checking out.

I am not an expert on the energy markets, and therefore I appreciated this article, which explains in simple terms some basic economic and futures trading principles – and common misconceptions. Here are a few interesting quotes:

If our representatives did understand the oil markets, they’d know that the true telltale sign of a speculative bubble is not rising trading volumes but rising oil inventories. Speculators would be hoarding oil – building up inventories either in anticipation of higher prices or as part of a scheme to drive prices there. Yet according to the Department of Energy, U.S. oil inventories are now at below-average levels. U.S. oil stocks stand at 309 million barrels, versus 330 million in June 2005.

By providing a mechanism for locking in prices, the futures market makes it easier for oil companies to make costly investments in new production – which is the key to lowering prices at the pump.

Futures trading also discourages hoarding in an otherwise tight market. Without speculators willing to take the other side of so many futures contracts, oil refiners and other end-users might be inclined to ramp up their spot-market purchases and store more oil as a hedge against further price increases.

Even if you believe there’s no way that oil trading volumes could be soaring without influencing oil prices, remember that influence then has to run two ways.

If an index fund is indirectly driving up spot oil prices every time it buys a future, then the converse must be true, too – there must be an equal and opposite downward push on spot prices every time that future is sold. In other words, futures market critics can’t have it both ways.

There’s something else politicians conveniently overlook: futures trading requires two to tango. For every investor who is betting oil prices will go up, there also needs to be an investor willing to take the opposite side of that bet.

There is a lot more in the article itself. Read it for yourself and share your thoughts. Do you think oil speculators are to blame for volatility in the energy market? And, more importantly, what effect do you think increased congressional legislation on the matter will have?

More from Meg at The World of Wealth

We’re Looking at the Second Worst June in S&P History

As of Friday’s close, the S&P 500 Index is down 8.55% on a total return basis for the month of June. If things don’t improve during Monday’s trading, this June’s performance will be the worst June performance in S&P 500 Index history and the second worst in the S&P Index’s history. Remember, the S&P Index didn’t become the S&P 500 Index until 1957. Prior to 1957 it was composed of 90 stocks. Anyway, here’s a ranking of the ten worst Junes in the history of the S&P Index:

Although this June isn’t nearly as dismal as 1930’s -16.15%, it is still pretty bad compared to the other worst returns for June. However, take heart. This June’s pitiful performance is the 38th worst monthly performance of all months going back to 1926. In other words, it could have been a lot worse!

Oh, and in case you’re interested, Standard & Poor’s has a pretty cool performance tool that you can use to lookup the historical returns for the index. You can access it here. All you have to do is fill in the date and the table furnish you with the return for the index up to that point. Just be sure to use the TR or total return numbers if you’re using the index as a benchmark. It’s pretty cool tool. I use it all the time.

OT: Wal-Mart’s Changing Its Logo

From this:

To this:

Source: Wall Street Journal

According to the Wall Street Journal, the logo will be white letters on an orange background followed by a white sunburst. Another big change is that “Wal-Mart” will now be “Walmart”.

It’s definitely different. I suppose it does make Walmart look a little more up-to-date. Unfortunately, they still have their awful stores so not everything is changing.

What do you guys think? You like? It’s not gonna make me a Walmart patron.

Summer Spending

Do you find yourself spending more in the summer months? Not just because of vacations, but in general?

After reading a recent post by English Major, it hit me.

This morning I was pouring over my actual budget (what I’ve spent as opposed to what I planned to spend) at Mint, and I couldn’t believe how much I’ve spent already in June.

I have spent over $600 on food (including alcohol) this month. For just me! I know, it’s embarassing, but that’s $200 more than I usually spend – and there’s still one weekend to go! I have also spent over $300 on entertainment – I usually spend less than $50! I was racking my brain trying to figure out what’s going on, and then I read EM’s post (linked above).

The culprit is Summer!

Days are long and the weather is great. The sun is still shining at 8:45pm here in Texas, and I’m loathe to head home from work at 5:30pm, cook dinner at home, and flip on the TV – a common wintertime ritual. Plus the nicer weather just puts you in a good mood – perhaps a recipe for unchecked spending?

Instead every day feels like a bit like the weekend. I have been hitting up patios right and left for weeknight dinners, going out to more lunches, and frequenting some local outdoor concerts (free ones, but somehow after paying for parking, a bottle of wine, and some cheese and crackers to eat on the lawn, those free concerts sure do cost me a lot!).

Now that I know this I’ll be sure to adjust my budget for July and August. Except there’s no where from which to cut expenses. Utilities cost more, gas costs more, and I don’t really shop much no matter what season it is. Then there’s the vacation I’m planning next month. Plus with all the sandals I’m wearing in this heat, I’m really craving a manicure and pedicure – a splurge I can easily do without in other seasons.

So what about the readers? Do you spend more in during the summer?

More from Meg at The World of Wealth

GIVEAWAY: I’m in a Generous Mood!

I’ll be out the next couple of days. So, to keep you busy I thought I’d do another giveaway. This one’s different from all the others because it’s going to require you to do a little work.

Here’s the deal:

This giveaway will be the entire collection of books listed on the right hand side of this page! I calculated the total and it comes to about $60 worth of books, which is pretty cool. None of the books are closely related so together they make a nice “success” library.

To be entered into the giveaway:

1. Tell me your favorite AllFinancialMatters post. PLEASE put some thought into your selection. In other words, don’t just pick something from last week. And PLEASE don’t pick one that you haven’t read. A good place to start is on my Directory Page, which is a listing of some of my favorite post arranged by topic. You can simply leave the title (you don’t have to post the link if you don’t want to).

2. Subscribe to AllFinancialMatters. If you’re already a subscriber just mention it in your comment. My subscriber numbers are way off so I’m trying to get them back up to where they’re supposed to be.

Finally, please remember my two rules:

1. The contest is only open to U.S. citizens (sorry I meant to say RESIDENTS).

2. Only one entry per person.

I’ll randomly-select the winner on Friday or Monday and announce it then.

I’ll see you in a couple of days! Good Luck!

The Law of Household Economics

I read an interesting and funny article by Karen Blumenthal in today’s Wall Street Journal titled Vanishing Act: The Law of Household Economics ($). She defines “The Law of Household Economics” as for every financial windfall, an equal, unexpected cost. She then goes on to lament the fact that everytime she and her husband experience a financial windfall, something comes up that requires them to spend that very windfall:

Our family first stumbled on this reality [the law of household economics] several years ago when we cleaned out closets and kids’ toys to join in a family garage sale. We loaded up the minivan with stuff the day before the sale and my husband stuck a dolly in the back just in case someone needed it. It shifted, and when he slammed the back door, the handle of the dolly crashed through the rear window.

Some colorful words were shared. But despite the setback, the garage sale went on. When the organizer tallied up the proceeds, she challenged us to guess our take.

“Three hundred and twelve dollars,” my husband replied.

She looked stunned. He was off by maybe a couple of bucks. “How did you know?” she asked.

“That’s what it cost to fix the minivan window,” he sighed.

Been there, done that! Actually, I would call that “luck” rather than bad luck. There’s nothing worse than an unexpected expense when you don’t have the money. So, although it may be frustrating, I would consider it a blessing when there’s extra money to pay for an unexpected expense. There’s lots of people out there that aren’t quite so lucky.