UNDP Warns Energy Crisis Is Draining Development Budgets

UNDP estimates that global fossil fuel subsidies will reach US$1.1 trillion in 2026, an increase of US$410 billion from 2025 if average oil prices remain around US$88.6 per barrel.

Developing countries are spending billions to shield people from rising energy costs caused by the conflict in the Middle East, leaving fewer resources available for education, healthcare and other essential development needs, according to a new United Nations Development Programme (UNDP) report.

The report, Military Escalation in the Middle East: Cushioning the Global Shock, says many low- and middle-income countries have relied on fuel subsidies, price caps, tax reductions and demand-management measures to soften the impact of higher oil prices on households and businesses. While these policies have provided short-term relief, they are placing increasing pressure on already strained public finances.

Fossil fuel subsidies expected to surge

UNDP estimates that global fossil fuel subsidies will reach US$1.1 trillion in 2026, an increase of US$410 billion from 2025 if average oil prices remain around US$88.6 per barrel. In a more severe scenario where oil prices average US$110 per barrel, subsidies could climb to US$1.43 trillion.

The report warns that continued reliance on fossil fuel subsidies not only increases financial pressures but also slows progress toward cleaner energy systems by locking countries into high-carbon development pathways. It says these growing costs reduce governments' ability to invest in long-term priorities such as renewable energy, healthcare, education and infrastructure.

Debt pressures add to economic strain

The report highlights that nearly half of the world's poorest countries are already in debt distress or face a high risk of reaching that point. Developing economies are expected to spend a median of 9.53% of government revenue on interest payments this year, the highest level in 25 years and roughly double the share recorded a decade ago. Between 2024 and 2026, an estimated 55 developing countries are projected to spend more than 10% of their government revenue servicing debt.

UNDP Administrator Alexander De Croo said countries should not have to sacrifice future development because of a crisis beyond their control. He called for easier access to international financial support and faster investment in renewable energy, arguing that strengthening clean energy systems will improve both energy security and economic resilience while reducing exposure to future global shocks.