March 8, 2024 - The world has seen record-setting investment in energy amid slowing overall demand growth, a trend likely to continue in the years ahead. But why are companies pumping more money into chasing demand that won't be there? It may seem like a contradiction, but those funds are needed to align with the transformative shift in future global energy supply, trade and consumption patterns.  

There are three distinct forces, each influencing one another, shaping the future of energy: demographics, energy decarbonization and geopolitical rivalry.

Demographics: Slower global energy demand growth 

The first – and most straightforward – of the driving forces is slower growth in the world's working age population. 

Growth in the largest and most energy intensive segment of the population will be slower than it used to be.

The global working age population (ages 15-64) increased by 1.2 billion people from 2000 to 2020, but from 2020 to 2040 the increase is projected to be 36% lower at 778 million people. Two-thirds of this growth is occurring in Africa, which has enormous potential for economic and energy demand growth, but, so far, is only partially realized. The working age populations are declining in many large energy consuming markets, including China, Europe and Russia – an unprecedented trend outside of war, famine or disease. 

Slower global population growth will translate to slower energy demand growth. Improved energy efficiency, including greater electrification of road transport, also plays a role.

World primary energy demand growth will slow to an annual average increase of 0.6% in 2024-2040, according to the S&P Global Commodity Insights long term global energy demand outlook released in July 2023, compared with 1.9% from 2000-2023.

Decarbonization of energy: Record levels of capital investment

The second driving force is the decarbonization of energy, or more commonly referred to as the energy transition. This force explains why energy investment will grow faster than ever – and in excess of the pace of energy demand growth.

Simply put, government interventions to promote decarbonization of energy production and consumption are guiding more money into energy and related investment. The amount of money going into hydrogen, carbon capture, batteries, renewables and power delivery systems would surely be less without government interventions. Some of this will go to replacing fossil fuel energy used in transportation and power generation as opposed to simply satisfying growing demand. At the same time, large volumes of capital will continue to go into fossil fuel investment, even if demand for oil, gas and coal flattens out or begins to decline.

The trend of rising investment is already underway. Between 2015 and 2023, global capital expenditures in the energy industry grew from $1.3 trillion to $1.9 trillion. Higher spending is driven by renewable energy, batteries, and power transmission and distribution.

By 2030, S&P Global estimates total annual world energy spending will be $2.6 trillion, up 37% from 2023.

Geopolitical rivalry: Changing geography of trade and supply chains, more investment, and upward cost pressure

The third driving force – geopolitical rivalry – is what Chinese President Xi Jinping refers to as "changes unseen in a century," – a favorite catchphrase of his. While the phrase can be interpreted in different ways, its essence refers to a view of the decline of the US and, at the same time, the rise of China.

Washington sees a rising China as a challenge to the liberal world order that the US has led since the end of World War II. The rise of China's economy is the most profound global development since the end of the Cold War.

The US and China have different perspectives about the future of the world. This rivalry is reshaping the global economy, finance, trade and military affairs, including energy investment.

For example, the US is encouraging the development of an alternative battery supply chain that goes around China. China dominates many aspects of battery materials processing and manufacturing. What the US effort means is more investment, but also higher costs than would otherwise be the case, at least at times.

The redirection of Russian oil flows from Europe to Asia is another illustration of the changing world order linked to the US-China rivalry.

Energy changes with the world

There will, of course, be surprises in the months and years ahead. Wars, diplomatic breakthroughs and technological advances are difficult, if not impossible, to predict with precision or accuracy, but they already occur and will continue to do so.

Long-term trends will not turn out to be straight lines up or down, there will be downturns and accelerations, but these three driving forces will endure and shape the world for years to come.