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How the Iran War is impacting Latin America's big economies, and the lessons that should be learned.
The price of Brent crude oil, the international benchmark, spiked to $119 per barrel on Wednesday after Persian Gulf oil facilities were attacked and damaged as the Iran War passed through its third week. Shipping and trade disruptions added layers of cost shocks to a number of industrial sectors while oil exports from other regions of the world are enjoying a boom. In Latin America, the impact has been complex and poses challenges for the top five economies — Mexico, Brazil, Argentina, Colombia and Chile.
What is underneath?
Overall, the region’s oil and gas exporters have seen a massive revenue increase from the spike in global oil prices, but it comes with the danger of fueling inflation throughout the hemisphere. Many Latin American countries either routinely apply or have adopted emergency provisions to subsidize fuel prices for consumers, trucking and cargo operations, and this means greater fiscal pressures at a time when much of the region was already struggling with debt and anemic economic growth.
Drilling down on the top five economies, the similarities in impact become striking:
MEXICO: It is a big oil producer but also a huge importer of refined gasoline. The fiscal deficit risk is high because the government moved to subsidize fuel excise taxes, threatening to push up the fiscal deficit to 5% of GDP. Mexico’s public debt, all told, may reach 60% of GDP. This would risk a credit rating downgrade for both the sovereign and the state oil company, Pemex, that could tip both into junk status.
BRAZIL: As a net oil exporter with high domestic debt, Brazil is also being pulled in both directions. Every $10 per barrel increase in oil prices is estimated to boost Brazil’s GDP by 0.1% and reduce its budget deficit by 0.2% due to increased revenues from its state oil company, Petrobras. But Brazil also must import diesel fuel to sustain domestic transportation of goods and cargo. President Lula da Silva, who faces a tough re-election campaign this year, has struggled to keep inflation under control during his presidency as public debt has ballooned, and has taken drastic measures to subsidize diesel costs. If inflation returns, public debt service costs will rise and potentially whipsaw the oil revenue gains.
ARGENTINA: For Argentina, the timing of the rise in global oil prices is both a blessing and a curse. Argentina’s energy sector, booming from production as the Vaca Muerta deposit, had been projecting a trade surplus of US$10 billion by the end of this year, and it could rise to US$12 billion as a result of the oil price spike. This will allow President Javier Milei to accelerate the accumulation of dollar reserves at the Central Bank. But it will come with the headache of more inflation. Domestic fuel and gas prices have already jumped 6% in March and it is rippling through the rest of the economy. Milei’s radical reform of the state has slashed generous subsidy regimes that he is in no mood to revive, so the political pain will be hard to mitigate.
COLOMBIA: Here is where things have gone badly, owing mostly to President Gustavo Petro’s tone-deaf policies of aggressively phasing out oil production despite it representing 40% of Colombia’s exports. Every $10 increase in Brent crude price generates $80 to $100 million in added EBITDA per month to the independent oil sector’s coffers. Yet, Petro refuses to lift his ban on new exploration or licenses and went ahead with ending all state subsidies for gasoline as scheduled — right in the teeth of this month’s oil price spike. This has led to a jump in inflation owing to energy and food cost increases. Furthermore, the country’s natural gas reserves have dwindled, leading to a reliance on increasingly expensive imports to power industrial output. The Central Bank responded to inflationary pressures with a shock increase in interest rates to 10.25% that could go even higher. The fiscal impact will be tempered with the end of subsidies but the economy is left to absorb the shock on its own.
CHILE: Chile is not an oil producer and imports 98% of what it consumes, so the oil price spikes could get ugly here. The government of President Jose Antonio Kast, who was inaugurated shortly after the Iran War began, has relied on a price stabilization mechanism through state subsidies to keep fuel costs under control. This will be expensive if the war drags on, reaching into the billions of dollars. Market nerves have also led to capital flight and a sharp devaluation of the peso. Copper prices did rise to historic highs in January, generating a major windfall for Chile. But war uncertainty has driven precious metals down and copper has given up all its gains this year. One bright spot is that Chile has transitioned a major part of its electrical generation to renewables, largely shielding electric bills from the oil price shock.
But there is also one relatively common hit that cannot be easily remedied for the region’s biggest producers of food and agricultural products. Iran is a critical global exporter of fertilizer, and the closing of the Strait of Hormuz has trapped between 25% and 44% of global supplies. This is causing a panic in South America as it enters its purchasing and planting window for this year and next.
Brazil’s soybean industry relies on Iran for most of its nitrogen-based fertilizers, and crop yields are in danger of falling as much as 15% for the 2026/2027 season if supplies remain trapped for the next few weeks. Argentina’s wheat and corn crops are facing a similar crisis. Phosphate fertilizer production in Brazil is also in a panic since it depends on inputs of sulfur byproducts from Persian Gulf oil refining, which normally produces 44% of global sulfur output but is now severely disrupted.
Frantic attempts to obtain nitrogen-based fertilizers from Morocco and Nigeria and phosphates from the dilapidated Venezuelan sector are not yielding promising results. The latter cannot possibly meet demand due to years without investments, and Brazil is competing with India for Morocco and Nigeria’s favor in diverting shipments. China has also imposed a near-ban on fertilizer exports to safeguard its domestic supplies. The impact of shrinking crop yields in Latin America will not only be felt in domestic consumer prices in the region and abroad, but in export revenues and reinvestment capital for the vital agrobusiness industries if the war impacts drag on into more planting seasons.
Our take:
The speed by which the war’s impacts have struck Latin America’s economic and financial pillars was almost immediate. This exposed some of the weak flanks in domestic policies that populist leaders have often been able to obscure or downplay without real political consequences — until now.
Brazil’s geopolitical childishness over the decades helped lead to a dependence on countries like Russia and Iran for fertilizers. Anyone with two eyes could see the economic and strategic risk implied in such bets.
Milei’s radical reform of Argentina’s state structures, trade relationships and geopolitical calculations were not fast enough to fortify his country against the shocks of this war, but global investments in tranquil, war-free Vaca Muerta are looking far more attractive right now than they would have under a Peronist.
Petro’s blinkered radicalism against oil, like most of his ideological sharp edges, never took into account how average Colombians would be affected. So nothing that is happening now should surprise anyone.
Mexican President Claudia Sheinbaum is reveling in touting state control of Pemex and the deepening of state oil’s role in more of the country’s economic activity. “Energy sovereignty” is one of her favorite spins on how her predecessor, Andres Manuel Lopez Obrador, dismantled the modernization of Mexico’s electricity sector and put Pemex back in the business of powering the country’s grid. But Pemex is such a fiscal sinkhole that any war windfalls aren’t enough to save it.
Chile has usually been more economically and financially resilient than its peers thanks to its structural advantages as a more developed country. But truth be told, it’s saving grace has usually been found in world copper prices, and its emergency funding mechanisms or rainy-day funds have come largely from copper export revenue over the years. The drop in global prices for precious metals as the oil spike hit has left it more vulnerable if the war drags on.
In the end, the high potential for severe volatility in the Persian Gulf was always latent if not flagrantly obvious, especially since the Iranian mullahs began pursuing nuclear weapons in a context of waging terrorist proxy wars throughout the region. If anyone in Latin America has not woken up to the fact that the world order has been changing for years now, they are all now awake.
It isn’t just the Europeans realizing they will have to develop their own security arrangements and rethink their relationships with Russia, China, Iran and others in that circle of influence. Latin America needs to stop playing superpowers off one another and do some growing up as well. The Western Hemisphere is ludicrously rich in resources, starving for investments and potentially quite self-sufficient in some important respects. The old caudillo strongman approach to capitalizing on these advantages has always failed as an economic philosophy, so there is no need to keep failing. Getting serious about fighting and dismantling cartels and organized crime, increasing security and domestic tranquility for commerce and citizens, reforming opaque state structures that impede development, and building bigger, more secure and reliable value chains in the Americas would make a lot more sense.