Uruguay: Time to Explore

What happened: High oil prices have dramatically exposed Uruguay’s reliance on fossil fuel imports.

Why it matters: Uruguay began offshore oil exploration in February, putting a sensitive issue for the ruling Frente Amplio back on the national political agenda.

What happens next: We expect fuel prices to erode government support and reinforce the push to explore offshore.

Uruguayans are not kidding themselves: fuel prices will rise again in the coming days. The Iran war and its impact on oil markets have once again exposed how total reliance on imported crude — combined with an expensive state refiner and distributor in ANCAP — hits consumers’ pockets.

In our view, however, this negative spillover from the conflict could have an unexpected upside for the government: it may sideline criticism within the ruling Frente Amplio coalition over offshore drilling.

After taking office, leftist President Yamandú Orsi (see Featured Personality) changed the pricing mechanism put in place by his liberal predecessor, Luis Lacalle Pou. Global oil price swings are no longer passed through directly; instead, they are filtered through executive decisions, allowing the state to absorb part of the increase.

In practice, fuel pricing becomes a policy tool aimed primarily at keeping inflation under control.

The first post-war hike came on 1 April, with fuel prices rising around 7%. The government argued it was smaller than in other countries facing similar pressures.

The reality is that by altering the pricing system, the government chose early on not to lower prices when oil was around $70 a barrel in 2025. Ignoring criticism, it effectively used that margin to cash in as part of an adjustment that Finance Minister Gabriel Oddone only acknowledged months later.

That decision worked in Orsi’s favor when oil prices surged amid the Iran war. The artificially elevated baseline acted as a buffer, preventing immediate double-digit hikes that would otherwise have been unavoidable.

Now, however, the situation is tightening. Oddone has announced further increases for May, and the regulator, URSEA, has submitted its pricing recommendations. Diesel — key for the agricultural sector during the current harvest — should rise by more than 10%, on top of the previous 7%. Gasoline is set to climb another 6%, pushing all fuels into double-digit cumulative increases, no matter what percentage the administration decides to keep for itself.

Up to a point, the strategy worked by chance. But rising prices will force the government into tougher choices, with no more room to build fiscal buffers.

From a structural perspective, this situation strengthens the economic case for offshore oil exploration. Successive governments have pursued this goal for decades, but for the Frente Amplio, it remains a sensitive issue due to its ties with environmental groups opposed to drilling.

While the government has yet to define an exploitation model in the event of a discovery after more than 50 years of unsuccessful exploration, Orsi may see offshore oil as a political escape valve from the mounting pressure of rising living costs.

In the meantime, the government faces a difficult outlook. Economic growth forecasts continue to be revised downward, with around 1.8% expected this year. Consumption is stagnating, with one notable exception: car sales, boosted by zero-interest financing, especially for EVs.

Between 2024 and 2025, EV sales in oil-poor Uruguay jumped nearly 150% and now account for close to one-third of new vehicles sold each month. Then again, Uruguay has historically had the most expensive gasoline in the region.

With further price increases ahead, that trend is likely to accelerate in a country with abundant electricity.

For many, this shift could enhance energy independence in transport. But for Orsi’s tax-addicted government, it also presents an opportunity to boost revenues. Plans are already underway to eliminate subsidies and reinstate taxes on EVs.