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Commodity Investing

Cheap Oil Forces Billions in Write-Downs

American drivers might be envious of this week’s chart. It shows the drop in Venezuelan gas prices in U.S. dollars over the last five years. Right now, 1 gallon of gas in Venezuela costs one-fifth of a penny or $0.002.

Befitting Venezuela’s role as the holder of the world’s biggest oil reserves and in an attempt to gain favor with the people, the government set the price of premium-grade gas at  US$0.05 per gallon. Then, an annual bolivar inflation rate of 50% gradually pushed the price of oil up in bolivars and down in dollars.

With crude exports accounting for about 95% of the country’s foreign currency earnings, the oil price crash is pushing Venezuela towards bankruptcy. The country’s economy is expected to shrink 7% by the end of the year.

The Venezuelan government controls the sale and purchase of all foreign currency in the country. The rate it sets depends on the needs of the buyer. While the official exchange rate is 6.3 bolivars to the dollar, the government has two other rates at about 12 bolivars and 50 bolivars. The black-market rate is about 190 bolivars to the dollar.

Using the stronger 6.3-bolivar or 12-bolivar exchange rates, though, is unrealistic. The government severely limits the number of transactions at the stronger rates, forcing importers to accept the weaker 50-bolivar or black-market exchange rates.

As a result, there is a nationwide shortage and markup for food, medicine and other goods (a 36-pack of condoms, for example, costs the equivalent of $755).

And the U.S. will feel the impact. At least 40 members of the S&P 500 could be forced to take billions of dollars in write-downs.

Why? These 40 companies carry monetary assets in bolivars. These companies calculate their assets assuming a 6.3-bolivar or 12-bolivar exchange rate. Due to the limited number of transactions allowed at the stronger exchange rates, companies are forced to take the weaker exchange rate, making their assets worth a lot fewer dollars.

This means that until oil prices rise and the value of the bolivar strengthens, many U.S. companies will be forced to accept the weaker exchange rates and take losses on their balance sheets*.

Do your homework. Find out how much your investments rely on the Venezuelan currency.

 

 

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the position of professional analysts*. 

 


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