Rising energy costs threaten development spending as poorer nations face growing debt and subsidy burdens
Developing countries are bearing the economic cost of escalating tensions between the United States and Iran, as higher energy prices force governments to divert billions of dollars from development priorities to fuel subsidies, according to a new United Nations Development Programme (UNDP) report.
The report, titled “Military Escalation in the Middle East: Cushioning the Global Shock”, warns that geopolitical instability in the Middle East is placing additional financial pressure on low- and middle-income countries already grappling with mounting debt burdens and limited fiscal resources.
According to the UNDP, many governments have expanded fossil fuel subsidies, price controls and tax relief measures to protect households from rising energy costs. While these measures help cushion consumers from immediate price shocks, they are significantly increasing pressure on public finances.
Fossil Fuel Subsidies Could Reach $1.43 Trillion
The report estimates that global fossil fuel subsidies could increase to $1.1 trillion in 2026, up by approximately $410 billion from 2025 levels, assuming average oil prices rise to $88.60 per barrel.
Under a more severe scenario, where oil prices reach $110 per barrel, subsidy costs could surge to as much as $1.43 trillion globally, further straining government budgets and limiting investment in critical public services.
UNDP Administrator Alexander De Croo said rising subsidy costs are forcing governments to redirect resources away from long-term development priorities.
“Money that should be building schools, hospitals and clean energy systems is being used simply to keep economies afloat,” he said.
Debt Challenges Deepen
The report notes that many developing economies entered the latest crisis with already fragile fiscal positions.
Nearly half of the world’s poorest countries are either experiencing debt distress or face a high risk of falling into debt distress, according to the UNDP.
This year, the median developing economy is expected to spend 9.5 per cent of government revenue on debt servicing, double the level recorded a decade ago and the highest proportion in 25 years.
The agency warned that rising energy-related expenditures could further weaken public finances and undermine investments in healthcare, education and climate adaptation.
Sustainable Development Goals at Risk
The UNDP cautioned that increased reliance on fossil fuel subsidies could slow progress towards the United Nations Sustainable Development Goals (SDGs) by diverting resources away from development programmes while reinforcing dependence on carbon-intensive energy sources.
De Croo said developing countries should not be forced to sacrifice their long-term development objectives due to external geopolitical conflicts.
“No country should have to sacrifice its future development to manage a crisis it did not create,” he said.
He urged the international community to expand access to financing and accelerate investments in renewable energy, arguing that clean energy development is increasingly essential for both economic resilience and energy security.
“The crisis has made one thing clear. Energy security and the energy transition are no longer separate agendas. They are one and the same,” De Croo added.
Outlook
The report highlights growing concerns that geopolitical conflicts are imposing economic costs far beyond the regions directly involved. For many developing countries, rising oil prices, higher debt-servicing obligations and increased subsidy spending are creating additional challenges at a time when governments are seeking to strengthen growth, reduce poverty and improve climate resilience.
Analysts say the ability of developing economies to manage these pressures will depend on access to international financing, stable energy markets and continued investment in sustainable energy infrastructure.
