The oil shock and the new political economy of development cooperation

The 2026 US-Israel-Iran war and the closure of the Strait of Hormuz have triggered one of the largest oil supply disruptions in modern history. Brent crude prices rose sharply, producing a major external shock for oil-importing developing economies at a moment when the international development system was already under severe strain. Petrochemical products shipped through the strait are also vital for agriculture, medicine and industry. The largest contraction on record of official development assistance (ODA) had already been recorded in 2025, while geopolitical tensions and rising defence expenditures are reshaping ODA spending priorities and development policy directions. This brief examines how the oil shock will impact development cooperation. The significance of the oil shock lies not only in the price increase itself but also in its timing, and it arrives amid an ongoing reconfiguration of development cooperation. The analysis is organised around two postulates that underpin the post-Cold War development architecture. The first is the existence of states in the Global South with sufficient authority and developmental aspirations and capacity to pursue broad-based development goals. The second is the existence of donor countries willing and able to support those states' aspirations. The oil shock weakens both postulates through different mechanisms. For many oil-importing developing countries, rising fuel, food and transport costs intensify fiscal stress, debt vulnerabilities and pressures on state capacity. Fragile states without strategic importance are especially exposed. At the same time, donor countries face mounting pressures from fiscal tightening, defence spending, domestic cost-of-living politics and growing scepticism towards multilateralism. These dynamics risk reinforcing one another in the sense that weakening state capacity can intensify instability, while rising instability may further reduce political support for development co-operation in donor countries. The brief argues that alternative financing sources such as Gulf finance, South-South cooperation and climate finance are unlikely to compensate for the scale of OECD donors' retrenchment. The likely result is a more fragmented, transactional and geographically selective development cooperation system, in which the countries most in need are increasingly among the least likely to receive sustained support unless they hold geopolitical importance. Three policy implications follow from the war. First, the multilateral development financing architecture requires urgent bolstering. Instruments such as the World Bank's International Development Association and the IMF's Poverty Reduction and Growth Trust face growing pressure precisely as low-income countries (LICs) confront simultaneous food, fuel, debt and financing shocks. Second, the increasing concentration of concessional finance to strategically prioritised states should not be treated as inevitable. Fragile states risk declining concessional finance and multilateral reach despite acute humanitarian need. Third, European donors must decide whether development cooperation remains anchored in poverty reduction or becomes subordinated to defence, migration and geopolitical priorities.