G E B W E B

Maybe the weak US dollar can explain the recent increase in the price of oil? If this is the case, then the price of oil measured in a stronger currency, such as for instance the euro, should remain roughly the same.

Let’s have a look at it:

From January 1, 2007 to May 1, 2008, the price of oil is up a stunning 86% in dollars. In the same period, the price rose 57%, measured in euros. From this we can deduce two things. First, the weak dollar is clearly an accomplice in the matter. However, we need to find another explanation for the remaining 57% increase measured in euros.

The biggest villain is still at large!

I have to admit it: I’m a speculator. I own shares in the United States Oil Fund (USO). I even own call options on USO. Needless to say, I have made a nice return so far.

You have probably heard that speculators are driving the price of oil up.  It’s all over the news. The recent run-ups have nothing to do with fundamentals, it’s all speculation, they say. And it’s not hard to believe. Oil is seen as a safe haven, a hedge against inflation and an ever sinking dollar. Crowds of investors are even buying oil merely a speculative play, in hopes of parabolic price-increases.

But those investors have little influence over the price of oil, because of the way oil is traded. Oil, unlike gold, is not a commodity which is traded directly. You buy contracts for delivery of oil at a specific place and time. The contracts settle at a specific date, at which time you have to take physical delivery of the oil. The current oil price quoted by most media is the June 2008 contract. It settles on May 20. If you’re a speculator, that means you have a few days left to sell your contract.

In order to drive the price up, you need to strangle supply or increase demand. There is no way the speculators can do this. They can get a free ride up along with the price, but they do not affect the settlement price, unless they refuse to sell by the expiry date. One contract is 1000 barrels, so unless you have an enormous basement, this is not a scenario you’d want. In fact, I’d be pretty desperate to sell at any price as expiry closes in.

The only real customers of the oil are the refiners. If they refuse to buy oil at the prices demanded by the speculators, the speculators will surely cave. The reason they don’t have to is that actual demand for oil is high enough that all contracts are bought by refiners.

To sum it all up: No speculator is taking oil out of the market and storing it up for later in some giant tank farm somewhere. It’s the drivers who are driving, literally, the price of oil up. I am biking the price of oil down.

Why am I doing this? The average American is using close to 25 barrels of oil per year (Wikipedia), either directly or indirectly through their lifestyle. That sums up to 1950 barrels over the average life expectancy of 78 years. The good news is that you only need two contracts to cover this. The bad news is that those two contracts are trading at more than $125 000 each. In practice you are shorting a huge amount of oil, and have taken 6 digit losses already. Oil was $60 last year. When I started monitoring it back in 2004, it was because it had broken up above $40, and this made me worried. I’m merely buying protection, and at the same time cutting my own oil costs, because I’m too wimpy to keep shorting my own lifestyle.

The question is: Do you feel lucky?

Someone put consumerism like this: Buying things you don’t need, with money you don’t have, to impress people you don’t like.

There are at least three inconsistencies in the above description.The current Credit Crunch brings one to attention: Buying with money you don’t have. If you’re buying a house, then you’re quite the exception if you can cough up the necessary money without getting a mortgage first.

This is where it all starts, at the bank (or mortgage broker). You state your income, your assets, and your credit history is investigated. In the end, you get a loan. This is all fine, if you can pay. Now consider Mrs. Sue B. Prime. The bank is unsure if her income can support the loan, but it also thinks the market value of the house she wants to buy will continue to rise. Since the loan is backed by the house, the bank decides to approve her mortgage.

Behind the scenes (at least to Mrs. Sue B. Prime), the mortgage is resold (to bigger banks, hedge funds, etc.) and the bank gets the cash it needs to keep selling mortgages.

All is well until the day Sue can’t pay anymore. If Sue can’t pay, the bank will take over the house, and sell it to cover the amount Sue owes. Problem is, the house prices where Sue lives are going down, and the bank has to sell the house at a loss. Actually, the loss is passed on to the investor who bought the mortgage from Sue’s bank. The investor is now getting nervous about his other mortgage investments, and stops buying mortgages (or demands a lower price, to cover the risk). End of story is that Sue’s original lender can’t keep lending (or even goes into bankruptcy because of the losses). Sue herself might also have to file for personal bankruptcy, since she can’t pay back the amount owed, even when the house is sold.

But it doesn’t stop here. As the number of foreclosures increases, the property prices keep sinking. There are now too many homes for sale. And because the mortgage banks can’t raise investment money for risky loans, fewer people are approved for mortgages, which means even fewer buyers. The prices continues to spiral downwards.

This not only affects new buyers and those buyers who can’t make their payments. Even rock solid home-owners who have a job, lose their equity, since their house loses market value. For instance, it used to be common to get a car-loan or boat-loan with the equity of the house as security. This may no longer work for some.

When a lot of consumers lose equity like this, it triggers lower discretionary spending. This affects the economy as a hole. Producers like GM are struggling with lower car-sales. Wal-mart sees lower consumer sales. Eventually more people in these affected businesses lose their jobs, and this lowers spending even more.

Is this bad? It is obviously bad for the people who lose their homes and have to spend years paying down debt. I don’t envy any of those, especially with the new bankruptcy laws. The lenders will also take a loss from people defaulting on their debts. These companies pushing risky loans had it coming. They knew the risk. The traders who bought these assets have also rediscovered risk, but it is part of the game. Those who lose their income because of the trickle down effects have much more reason to be mad at the banks and mortgage traders. They did nothing wrong.

The overwhelming majority of people will be affected relatively little. Sure, a lot of us must spend a tiny bit less than we’re used to from last year, but it will not affect quality of life much. It may even cause us to be a bit more conscious of what we buy (i.e less buying things you don’t need). This is certainly not a bad thing for the environment. I’m also under the impression that wealth is largely relative when all basic needs are addressed, so you might feel just as rich. Neither you nor your neighbor can afford that huge monster SUV. So less impressing people you don’t like.

Even so, it is likely that we’re in for some dark months in the stock market.

Imagine you are a salesperson and have to visit a number of customers. However, you want to spend as little time as possible driving. If you only have to visit two or three locations, it is usually easy to find the optimal route. You can use regular map services such as Google Maps, Yahoo! Maps or MapQuest to find the shortest path between two places. However, as the number of locations to visit grows, the task of finding the order in which to visit the locations becomes daunting.

Despair not, I have created OptiMap, the answer to all your roundtrip troubles. At least the troubles that involve 20 or less locations to visit. There might be time and fuel costs (and thus greenhouse gas emissions) to save here, but don’t come sue me later if you find a better route. The application is only as accurate as the data that Google Maps supplies to it. Furthermore, when 10 or more locations are entered, a heuristic called Ant Colony Optimization (with some other tricks, too) is applied instead of trying every possible ordering, so there’s no guarantee of finding the optimal route. The heuristic usually finds a solution impressively close to the optimal, however.

Today, I stumbled upon the page www.neighborrow.com, which is a social networking site with slightly better terms of usage than www.facebook.com. But the real reason I got interested in this site is that it facilitates easy borrowing of items between friends and neighbors.
In order to protect the planet, it is essential to optimize the use of its limited resources. If you’re like me, you probably have a whole lot of books, games, computer accessories, tools and equipment just hanging around being used infrequently at most. But your friend or neighbor might be in need of that component. Most people never ask their neighbor if they happen to have an old LPR cable stuffed away somewhere. And it would be very ineffective to brute-force search for the part by asking all your friends, compared to instantly finding that one right friend who has the item listed in his inventory on www.neighborrow.com.
As of today, the site is in its alpha stage, which means there are obvious bugs and flaws. There are only a handful of users yet. I still encourage you to take a look at it and join, to show your support to the developers. If the user base can reach a ‘critical mass’, then it could turn out to be an incredibly useful online community.
PS. Join the private group ‘Geirs Venner’ if you feel eligible. The password is geb, as it should be.