Brazil is navigating a period marked by economic pressure, political turbulence, and institutional disputes as the 2026 elections approach. Rising diesel prices driven by international conflict are affecting supply chains, profit margins, and government policy decisions, prompting negotiations between federal and state authorities to contain costs and avoid shortages. At the same time, political dynamics are intensifying, with the resignation of Rio de Janeiro’s governor triggering uncertainty at the state level and the federal government accelerating budget execution while managing congressional alliances. The rejection of the INSS CPI report reflects both a strategic victory and underlying political fragility for the Lula administration, which continues to face pressure from ongoing investigations and opposition narratives. Together, these developments illustrate a complex scenario in which economic challenges, electoral positioning, and institutional tensions are increasingly interconnected.
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Diesel Price
Since the beginning of the year, distributors and gas stations have increased their profit margins following the rise in oil prices driven by the war involving the United States, Israel, and Iran, according to data from the Monthly Report on the Petroleum Derivatives Market by the Ministry of Mines and Energy (MME). The expansion of margins intensified amid fluctuations in international oil prices and measures adopted by the Lula (PT) administration—such as subsidies and tax reductions—aimed at containing increases in diesel and gasoline prices during an election year. The gap between the price paid by distributors and gas stations to acquire fuel and the final resale price has risen by nearly 28% since early January, while margins on S-10 diesel, widely used by newer truck fleets, have increased by more than 17%.
Government Proposal
The Lula administration adjusted its negotiation strategy to secure political support and distribute the financial burden of reducing diesel prices during the current fuel price crisis. The rising cost of diesel is a concern not only due to its direct impact on prices but also because of supply risks. Finance Minister Dario Durigan announced on Tuesday (24/03) that the government intends to share the subsidy of R$ 1.20 per liter of diesel with state governments, with each side covering half of the cost. Previously, the proposal involved eliminating the ICMS tax, also through cost-sharing. According to Ministry of Finance technicians, the new approach emerged after discussions with governors concerned about fuel shortages in certain regions, particularly affecting agricultural producers amid the Middle East conflict. The alternative is considered easier to implement, as reducing ICMS would lead to revenue losses, raise electoral law concerns, and require unanimous approval from the National Council for Fiscal Policy (Confaz). Under the current proposal, the estimated cost of R$ 3 billion—covering a two-month period until the end of May—would be split between the federal government and the states. However, private importers argue that the subsidy model, including the previously announced R$ 0.32 per liter incentive capped at R$ 10 billion until the end of the year, remains insufficient to restore fuel imports, which declined sharply after the outbreak of the conflict.
Government Budget
As the 2026 electoral calendar approaches, the federal government has accelerated the execution of parliamentary amendments, reaching the highest volume of commitments for a first quarter since the beginning of Lula’s current term. Budget data shows that R$ 539.4 million was committed in the first three months of this year, compared to R$ 161.3 million in the same period of 2024. Last year, the federal budget was only approved at the end of March, resulting in minimal execution during the first quarter, with just R$ 26,900 committed. In 2023, commitments from January to March totaled R$ 256.4 million. With the normalization of the budget schedule this year, execution resumed earlier and at a higher level. Government officials state that this acceleration follows rules established in the new budget law and aims to provide greater predictability in the allocation of resources, avoiding the political disputes observed in the previous year.
Victory in the CPI
The Lula (PT) administration secured a political victory by orchestrating the rejection of the final report of the INSS Parliamentary Commission of Inquiry (CPI), following a period of setbacks that raised concerns within the Planalto Palace about potential political damage stemming from accusations involving members of the government and figures close to the president, including his son, Fábio Luís Lula da Silva (Lulinha). The commission’s conclusion, in the early hours of Saturday (28/03), took place amid heightened political tension, influenced by ongoing investigations into the Banco Master case, strained relations between branches of government, and the proximity of the electoral cycle. On Friday, the government obtained a majority with support from allied parties, including members of the Centrão, to block the report authored by Deputy Alfredo Gaspar (União Brasil-AL), which proposed indictments against Lulinha and requested measures such as preventive detention. Despite prevailing in the vote, government allies acknowledge that the administration was politically weakened during the process and that the issue is likely to be used by opponents during the election campaign.
Cláudio Castro
The governor of Rio de Janeiro, Cláudio Castro (PL), stated on Monday (23/03) that he is leaving office with his “head held high” as he prepares to run for the Senate in October. His resignation occurred on the eve of a ruling by the Superior Electoral Court (TSE) that revoked his mandate and declared him ineligible. In a speech lasting approximately 20 minutes, without taking questions, Castro listed what he considered to be the main achievements of his administration, including investments in public security, the concession of sanitation services, and infrastructure works. He also emphasized the importance of the governorship and criticized former governor Wilson Witzel, under whom he served as vice-governor until Witzel’s impeachment in June 2020, when Castro assumed the position. By resigning before the court’s decision, Castro sought to ensure that the succession would occur through an indirect election for the remainder of the term, which runs until the end of the year.
Government of the State of Rio de Janeiro
The state of Rio de Janeiro is undergoing a period of political uncertainty following the resignation of Cláudio Castro (PL), which occurred shortly before his conviction and declaration of ineligibility by the Superior Electoral Court (TSE). With the position of vice-governor also vacant since 2025, when Thiago Pampolha (União) resigned to assume a role at the State Court of Auditors, the state must hold a supplementary election to determine who will govern until the end of 2026. The Legislative Assembly of Rio de Janeiro (Alerj) approved a law establishing the rules for this election, but the Social Democratic Party (PSD), associated with pre-candidate Eduardo Paes, challenged the legislation before the Supreme Federal Court (STF). The most recent development was the suspension of the indirect election by Justice Cristiano Zanin. The final decision will be made by the full Court in a session expected to take place in early April, after Holy Week.
Analysis:
Brazil is entering a phase in which economic management and political strategy are increasingly intertwined, with external shocks amplifying domestic vulnerabilities. The rise in diesel prices, driven by geopolitical tensions, exposes the country’s structural dependence on fossil fuel as a transmission channel for inflation and supply chain pressure. The federal government’s attempt to share subsidy costs with states reflects both fiscal constraints and the complexity of coordinating a federative response under electoral conditions.
At the political level, the resignation of Cláudio Castro and the ensuing institutional dispute over succession illustrate the fragility of subnational governance in a highly judicialized environment. The overlap between electoral law, court decisions, and legislative maneuvering creates uncertainty that can affect policy continuity and investor confidence, particularly in a strategically important state such as Rio de Janeiro. Simultaneously, the acceleration of budget execution by the federal government signals a pragmatic effort to consolidate congressional support ahead of the 2026 elections.
Sources: A Folha de SP [1], [2], [3], [4]; O Globo [1], [2], [3], [4]; G1.
