Geopolitical Risk and the Shifting Tides of Latin American Energy Markets

The Latin American energy sector has become a battleground for geopolitical influence, with U.S. sanctions and policy shifts reshaping investment flows, regional alliances, and energy transitions. From 2020 to 2025, Washington's actions-ranging from tariffs on Venezuelan oil to territorial disputes with Guyana-have not only disrupted traditional energy markets but also accelerated a realignment of regional partnerships. For investors, the interplay of sanctions, instability, and renewable energy adoption presents both risks and opportunities.

U.S. Sanctions: Disruption and Diversion

The Trump administration's aggressive sanctions on Venezuela's state oil company, PDVSA, have had cascading effects. By revoking licenses for Chevron and other international firms and imposing a 15% tariff on Venezuelan oil imports (with a 25% tariff on third-party importers), the U.S. has pushed Venezuela's production toward underground networks and opaque markets. According to Mexico Business News, this has led to a 25–30% drop in Venezuela's output, with China and Iran filling the void as key buyers and suppliers of diluents, respectively. The resulting reliance on shadow fleets and illicit trade channels has further eroded transparency, benefiting corrupt intermediaries while undermining long-term sector stability, according to a Rystad Energy report.

Beyond Venezuela, U.S. policy has targeted cross-border energy projects in the Guyana-Venezuela dispute. The revocation of licenses for Shell's Dragon field and BP's Manakin-Cocuina development has disrupted Trinidad's ambitions to dominate Latin American LNG exports, as noted in a ScienceDirect article. These moves reflect a broader strategy to leverage energy as a geopolitical tool, but they also highlight the fragility of regional projects dependent on U.S. regulatory approval.

Investment Flows: Fossil Fuels and Renewables in Flux

While sanctions have curtailed foreign direct investment (FDI) in Latin America-falling 12% to $164 billion in 2024-new projects have emerged in response to geopolitical pressures. Rystad Energy notes that 2024 saw $72 billion in energy investments, driven by Brazil's Sepia and Atapu fields and Guyana's Whiptail development, according to an IEA report. However, these gains are uneven. Rystad Energy reports that Brazil, the region's largest energy market, has attracted $45 billion in FDI since 2020, partly due to its renewable energy incentives and offshore oil projects. In contrast, Argentina and Mexico face challenges as U.S. energy policies-such as Trump's push for LNG dominance-threaten to depress global oil prices, squeezing smaller producers, according to the Buenos Aires Herald.

Renewable energy adoption has also been redirected by sanctions. With access to Western capital constrained, countries like Chile and Brazil have turned to China for financing. Beijing's investments in lithium and copper mines-critical for electric vehicles and solar panels-have expanded its influence in Argentina's Vaca Muerta shale region and Chile's Atacama salt flats, according to an Atlantic Council brief. While this diversification reduces dependency on U.S. markets, it raises concerns about long-term sustainability and geopolitical leverage.

Regional Instability and the Erosion of U.S. Influence

U.S. policy shifts have indirectly fueled regional instability. By deprioritizing human rights and democratic institutions, Washington has emboldened leaders like El Salvador's Nayib Bukele, who has eroded checks and balances through indefinite states of emergency, an Americas Quarterly article warns. Similarly, Honduras has distanced itself from U.S. influence, renegotiating extradition treaties and deepening ties with China, according to the LatinAmerican Post. These trends reflect a broader backlash against perceived U.S. interference, particularly in countries with historical grievances, such as the 2009 Honduran coup.

The fallout extends to energy markets. As Latin American nations seek alternatives to U.S. partnerships, they are increasingly engaging with Russia and China. For example, Venezuela's oil exports to China have surged under sanctions, while Argentina's Régimen de Incentivo para Grandes Inversiones (RIGI) aims to attract Chinese and European investors for renewable projects, according to Curtis. This realignment risks fragmenting regional energy markets and complicating U.S. efforts to counter Russian and Chinese influence.

The Energy Transition: Promise and Pitfalls

Despite geopolitical turbulence, Latin America's energy transition has gained momentum. Chile, a global solar leader, increased its renewable electricity share to 55% in 2022, while Brazil added 25 GW of solar capacity in 2024, the UN Climate Summit reports. Mexico's Solar Aura I plant now powers 130,000 homes, reducing CO2 emissions by 60,000 tons annually, a Renovables Verdes article notes. However, financing remains a hurdle. The region's clean energy investment-$70 billion from 2015–2025-accounts for just 5% of global private investment, constrained by high interest rates and public debt, finds a Columbia report.

China's role in this transition is pivotal but contentious. While its investments in green hydrogen and critical minerals offer growth opportunities, they also risk creating dependencies that could undermine regional autonomy. For instance, China's control over 70% of global lithium processing capacity raises concerns about supply chain vulnerabilities for Latin American exporters, the World Economic Forum reports.

Implications for Investors

For investors, the Latin American energy sector presents a paradox: geopolitical risks coexist with untapped potential. Fossil fuel projects in Brazil and Guyana remain attractive due to their scale and resilience, but they face long-term headwinds from climate policies and market volatility. Renewables, while promising, require navigating regulatory fragmentation and financing gaps.

The key lies in diversification. Investors should prioritize countries with stable policy frameworks-such as Chile's green hydrogen strategy-and hedge against geopolitical risks by engaging with multilateral lenders and regional partners. At the same time, monitoring U.S.-China dynamics will be critical, as shifts in either superpower's energy policies could further disrupt Latin America's delicate balance.

In the end, the region's energy future will hinge on its ability to reconcile geopolitical pressures with the urgent need for sustainable development. For now, the interplay of sanctions, instability, and innovation ensures that Latin America remains a high-stakes arena for global energy investment.