US-Israel War Against Iran Spills Over; Lula Government Uses Oil Revenue to Subsidize Fuel Prices Ahead of Runoff

Less than three weeks before the October 25 presidential runoff, Brazilian President Lula's government issued a new decree on October 9 exempting gasoline imports and sales from federal taxes for thirty days, extendable as conditions warrant; on the same day, on top of the existing diesel import subsidy of 2.12 reais per liter, it added an additional subsidy of 1.40 reais per liter (approximately USD 0.28) to diesel importers. Brazil's government Social Communication Secretariat stated that the move aimed to "ensure that imports remain economically viable at this critical juncture of fuel supply."

The political clock is equally pressing. According to the international edition of The Hindu, in the first round of voting held on October 4, Senator Flávio Bolsonaro—son of former president Jair Bolsonaro—received approximately two million more votes than incumbent President Lula. Fuel prices have long been a highly sensitive issue for Brazilian voters.

However, what truly drove the Lula government to mobilize fiscal resources is a war far away in the Persian Gulf. After the United States and Israel launched a war against Iran in late February of this year, shipping through the Strait of Hormuz nearly ground to a halt. Before the conflict, roughly one-fifth of global oil supply transited through this narrow waterway; its disruption directly pushed up international crude oil prices. Brazil is both a major crude oil producer and exporter, yet still relies on refined fuel imports to meet domestic demand, placing it squarely on the front line of price volatility. The Brazilian government noted that since the relevant measures were announced in September, the international situation has further deteriorated, with international diesel and gasoline refining margins having risen to more than double their pre-war levels.

The international edition of The Hindu reported that rising international oil prices this year have substantially boosted revenues for Brazil's oil industry; the fiscal impact of the Lula government's current measures will be offset by revenues from the federal government's oil assets. In other words, Brazil's national oil revenues are being reversed to subsidize the cost of imported fuels that have risen because of the same war.

The significance of stabilizing diesel prices extends beyond the gas station. The report noted that diesel prices are a key variable in preventing trucker strikes and curbing food inflation. Brazil's 2018 trucker strike caused food prices to soar, emptied supermarket and gas station shelves, and resulted in billions of reais in losses, highlighting the political leverage of the organized trucker community.

The transmission chain from war and energy to votes is thus complete: the United States and Israel use military means to reshape the Middle East landscape, the Strait of Hormuz—a global energy chokepoint—becomes a secondary battlefield, surging oil prices expose those Southern countries that rely on imported refined fuels to external shocks; while countries that control state-owned oil assets can use industry revenues to buffer price volatility, their fiscal space must repeatedly be stretched between subsidizing livelihoods, stabilizing votes, and maintaining foreign policy independence. The Lula government's latest decree is the most recent node where this chain lands on Brazil's political agenda.