On Tuesday, May 8, President Donald Trump announced that the United States would cease its participation in the Joint Comprehensive Plan of Action (JCPOA), also known as the Iran Nuclear Deal. The JCPOA was originally negotiated and agreed upon in 2015 by the administration of President Barack Obama alongside Germany, France, the United Kingdom, Russia, China, and Iran. Following President Trump’s groundbreaking announcement on Tuesday, the international price of oil increased given speculation that Iran’s oil production and exports might decrease given the return of some sanctions. On Wednesday, May 9, international prices of the reference West Texas Intermediate (WTI) surpassed US$71.00 per barrel for the first time since 2014. On average, international oil prices have increased by 2.0% since President Trump’s announcement on Tuesday. If it continues, this trend is expected to strengthen the value of oil-backed national currencies, such as the Colombian Peso (COP), the Saudi Riyal (SAR), and even the Canadian Dollar (CAD).
Politics and International Commodity Prices
Commodities are naturally occurring raw materials that have low or no added value, such as unprocessed gold and crude petroleum. Normally, commodities are transferred to manufacturing centers where they are processed and eventually sold as consumer goods. Simultaneously, commodities can be divided into two main groups, mineral commodities and agricultural commodities. Mineral commodities include naturally occurring metals such as copper, gold, and silver, as well as crude petroleum, even though this last one is technically not a mineral. Meanwhile, agricultural commodities include coffee, sugar, cocoa, corn, coconuts, and soybeans, amongst many others.
Both types of commodities have intrinsic differences in the nature and economics of the category. In the case of mineral commodities, this category is composed of naturally occurring solids and liquids that are extracted from the earth and thereafter transformed into consumer goods. Commodities such as gold, copper, silver, and oil are found in specific geographic areas throughout the world. Furthermore, these minerals are the product of natural processes that have taken place for millennia. Therefore, mineral commodities are finite and highly coveted. For instance, it is expected that copper and gold reserves will only last another 25 to 60 years depending on the rate of global demand, particularly considering that a mineral such as copper is used in household appliances that are emblematic of the expanding middle class. An analogous dynamic is occurring with fossil fuel resources as exploitation continues and accelerates.
Similar to mineral commodities, agricultural commodities can only flourish in certain parts of the world, mainly in temperate and tropical climates, where most crops can be successfully cultivated. However, unlike mineral commodities, agricultural commodities are not finite, but rather renewable as long as the climatological and soil conditions allow agriculture to take place. Likewise, the economic yields of agricultural commodities are collected in the long-term, given that these crops require an up-front investment and it can take years for specific crops to become productive. For example, such is the case of the highly lucrative cocoa tree, mainly cultivated in West Africa and Latin America.