Global Energy Outlook to 2040

My recent musings on peak earnings, cyclical industries, value traps, and Chevron got me thinking about the state of the energy industry and whether it is a shimmering opportunity at once-in-a-blue-moon price for entry or a cross-dressing value trap disguised as an opportunity. Everyone knows that the price per barrel of oil has been getting decimated for about a year now – it has dropped over 50% in price since July 2014. That has led to the price of ownership in companies such as Exxon and Chevron to fall almost as drastically, with share prices collapsing ~30% for Exxon and ~40% for Chevron from their peak. What to make of all of this?


 

Secular Trends

In order to arrive at a conclusion, we first need to back up and zoom way out to see the narrative of the big picture. What are the secular trends out into the future to say, 2040, like in Exxon’s energy outlook to 2040.

First, global population is projected to increase by 2 billion people by 2040. It might seem like a bit of a paradox since global birth rates have been dropping. Why will population keep growing? In a nut shell, it’s the momentum created by earlier, higher birth rates that are echoing into the present and the future. If you want more details, check out this great video on global population by Hans Rosling:

Second, along with an increase in overall global population, prosperity is projected to increase resulting in an additional 2.8 billion people joining the middle class. Exxon’s definition of middle class in its 2015 Outlook for Energy means earning enough to have discretionary spending power beyond basic necessities: the ability to purchase durable consumer goods, climate controlled rooms, access financing, purchase homes and cars, etc. 2.8 billion people are projected to move up the income ladder to have discretionary spending power by 2040.

Effects on Energy

With data projections showing overall global population growth and a growing “middle class” with discretionary income to spend, the main secular trend of our generation seems to be: more people with more money. What are the possible effects this could have on energy companies such as Exxon and Chevron?

global energy outlook to 2040 2

Demand for energy will rise. That’s pretty obvious once you realize just how much energy you and I spend in the developed world. If we have 2 billion additional people added to the world, with 2.8 billion people rising out of poverty to have discretionary income, there is going to be an overall increase in global energy use.

global energy outlook to 2040 3

Even though the developed world will see total energy use actually decrease because of increased efficiency and technology, it will rise for the rest of the world as the 2.8 billion people demand the luxuries of modern life which in turn depend on energy.

What’s interesting is that transportation fuel demand is set to rise, but it’s actually going to decrease for light-duty vehicles, like the cars you and I drive; those are going to get more fuel-efficient.

However, the majority of the increase in transportation fuel demand is going to be from heavy-duty, the trucks and freight moving goods around the economy. This makes sense as 2.8 billion more people will be demanding all sorts of consumer goods with their discretionary income, which have to be transported to the customers. And again, that growth will be coming mostly from the rest of the world outside the developed countries.

global energy outlook to 2040 4

There will be more chemcial demand as well to create the plethora of consumer goods in modern society. Companies such as Exxon and Chevron are integrated energy companies and are in the business of discovering, extracting, and processing petroleum. The processing part not only creates all the fuels we use – from jet fuel to gasoline – it also produces the chemicals necessary for making plastics and all sorts of consumer and industrial goods that we find in modern life.

global energy outlook to 2040 1

I found this really interesting as it shows what the projected energy sources in 2040 will be. Even though oil and coal demand will only grow at 0.8% and 0.1% over the next 25 years, it will still be dominating the energy needs of the world. Green energy such as wind and solar is expected to grow the most at 5.8%, but since they only make up such a small part of the energy picture today, that robust growth will not make a dent to our hydrocarbon energy needs.

Global Energy Consumption

I apologize that this graph is based on data from 2007: I wasn’t able to find an updated graph on world energy flow closer to the present (if anyone does stumble across it, please send me a message). However, for all intents and purposes, I believe this is still accurate enough to reflect humanity’s energy consumption on 2015.

global energy outlook to 2040 a

You can clearly see what energy sources dominate humanity’s energy needs. You can peruse the rest of the world in the 2011 report by Lawrence Livermore National Laboratory.

Now for fun, let’s take a look at energy consumption flows for OECD and non-OECD countries, this time with up to date information.

OECD Energy Flows

The United States:

global energy outlook to 2040 b

Canada:

global energy outlook to 2040 c

The United Kingdom:

global energy outlook to 2040 d

France:

global energy outlook to 2040 e

Japan:

global energy outlook to 2040 f

South Korea:

global energy outlook to 2040 i

Iceland:

global energy outlook to 2040 g

With the exception of France and Iceland, in this small sample of OECD countries, hydrocarbons are by far the dominant energy source. I found Japan interesting as it’s common to hear about nuclear being a big energy source in Japan. But perhaps it’s some sort of mental bias caused by repetitive coverage of the Fukushima nuclear disaster in 2011.

Non-OECD Energy Flows

China:

global energy outlook to 2040 j

India:

global energy outlook to 2040 k

Russia:

global energy outlook to 2040 l

South Africa:

global energy outlook to 2040 m

Saudi Arabia:

global energy outlook to 2040 n

Haiti:

global energy outlook to 2040 o

Countries at the bottom of the economic development rung, like Haiti, still rely primarily on the most ancient form of humanity’s energy: biomass (ie. burning wood for energy). As you start to progress up in economic development, you utilize more efficient and abundant energy sources, such as coal (as India and China have done for the past few decades). From coal you move onto even more efficient forms of energy, such as petroleum and natural gas. You see the pattern?

Conclusion

Let’s summarize:

  1. Total population will grow by 2 billion more people, from 7 billion today to 9 billion by 2040.
  2. Around 2.8 billion people are projected to move into the middle class, where they will have discretionary income and higher energy needs.
  3. Hydrocarbons will continue to dominate humanity’s energy needs by 2040, despite robust 5.8% in wind/solar/biofuels growth and 2.3% and 1.8% growth in nuclear and hydro.
  4. Based on the energy flows that occur when countries move from developing to developed countries, hydrocarbons historically play a large role in meeting energy needs.
  5. Even mature, developed countries – outside a few outliers – rely heavily on hydrocarbons.

Based on the data I can see, I don’t see how hydrocarbons are not playing an important role in humanity’s energy needs by 2040. Could some black swan event, such as the invention of some radical clean, renewable energy technology completely change the energy game? Sure it could. But based on the data and evidence I have on hand, it seems more likely that hydrocarbons are here to stay as the dominant form of energy, at least in my lifetime.

So what does that say about investing opportunities in the energy sector? Where on the graph are we:

global energy outlook to 2040 s

To leave you with a most underwhelming answer: you need to gather the data and facts and come to your own conclusion.

*A place to start with gathering data on this topic is here.

Recommended Readings

9 thoughts on “Global Energy Outlook to 2040

  1. Hi Kapitalust,

    Nice article? I enjoyed reading it. I also guess/bet that the majors will play a roll in a post-hydrocarbon era. They will probably invest in the new technologies once they can also produce decent profits (and the majors are on of the few companies that could do it on a massive scale).

    Cheers,
    Geblin

    1. I’m not sure how the majors will fare when the inevitable transition away from hydrocarbons comes: they could just as easily fall victim to clinging to legacy like Eastman Kodak as successfully navigating change like IBM has. It’s a toss up and I don’t let that speculation play part in my thinking on the majors.

      What does affect my thinking is what the projections for energy use looks like a few decades out and from the best data available, it seems more likely than not that hydrocarbons will still be playing an important role in global energy consumption and from there I can assume that the majors will be playing a role in supplying those hydrocarbons for good profit.

  2. While I do not necessarily disagree with the Outlook (unfortunately) you do realise that basing your opinions on the outlook for Oil companies on the Energy Outlook report from… Oh… An oil company!!! Could be rather erroneous?

    Of course they are going to project that the world will still be using tonnes of HC’s in years to come, if they did not what sort of message would that send out to their investors?

    Like I say, they could be spot on but you must realise they have a vested interest in these types of reports so it might be better to try to find one that is a little less biased to base you overall opinion on it.

    I also agree with Geblin anyway, I think once the tipping point comes with renewables or anything that might be developed in the future they’ll get in on the act. They have the money available to build the infrastructure and energy is energy and profit is profit and I doubt they really care about clinging onto HC’s for any kind of legacy. All just IMO of course.

    Cheers!

    1. While I completely understand that the report is generated by an industry insider and could potentially have major biases in the way it projects out into the future, my take is the follow:

      1. Like it or not, the entire world’s energy infrastructure is built around hydrocarbons. Switching away from this, in my opinion, would take many, many years.

      2. I take this projection out to 2040 to be the “most probable” outcome in a bell curve distribution of probabilities. I don’t discount that a revolutionary, clean tech could change the game between now and 2040. Or that the world ends by descending into a zombie apocalypse. I just think that the best probable outcome is what the report projects. I try to make bets based on what seems most probable. If that ends up being wrong, I’m willing to live with it.

      3. While Exxon may have a vested interest in a report that says that hydrocarbons will continue to play a dominant role into the near future, it also has an interest and responsibility to it’s owners to report accurately and not give into wishful unicorn thinking. I took their projections to be very realistic and tamed. It has to be for them to make the half trillion dollar revenues that they generate. I would imagine the last people they want to fool is themselves as billions of dollars in profit are on the line. They project cars will be much more efficient going into the future, which will tame gasoline demand. Heck, they only project a 0.8% average annual increase in petroleum consumption per year from now to 2040, with consumption going down because of increased efficiency in the “developed world” offset by consumption increases in the rest of the world due to a mix of population growth and a growing global middle class.

      To conclude, based on my assessment, hydrocarbons still have a major role to play for global society in terms of providing the energy the world needs and for whenever the eventual shift to cleaner technologies occurs. It’s my opinion that the most probable outcome for our lifetime is that hydrocarbons will continue playing a large and important role for global energy needs.

      This may sound contradictory, but I really do wish some clean energy technology existed right now that could help mitigate the potential damage burning hydrocarbons has on the earth. However, there is nothing that I have read about that can match the energy efficiency and power of hydrocarbons yet. Thus, I have no problems holding companies that provide the world with the energy it demands.

      Thanks for bringing up some good points TFS – it really made me think!

  3. On the contradiction: I’m an extreme realist. I process the world through the lens of realism. I don’t know if it’s the way my brain is coded or the topics I studied all throughout education (history and politics) influencing how I view the world. For me, the range between idealism to realism depends on the time frame we are talking about in relation to the topic. I understand that this is a bias of mine and I try to factor for it by reminding myself that I am prone to this tilt in viewing the world.

    You’ve mentioned a lot about energy generation and consumption, which is a major area of what hydrocarbons are used for in the world. But what about all the chemicals we derive as a byproduct of processing raw hydrocarbons into all the fuels? Modern life – with the plethora of products – is based in some way or another off hydrocarbons. It’s just… hydrocarbons are just such an “essential” building block of modern life that I just don’t see how it will go away in significance in the next few decades. Even if the more wealthier countries can afford to be first adopters of renewable energies, the 1+ billion people in China, the 1+ billion people in India, and the several billion others in developing countries will not realistically be using more expensive, renewable energy technologies to fuel their growth. They will use hydrocarbons to transition their countries into more developed economies because it is more cost efficient to do it that way currently.

    I think I tend to agree that in the wealthier countries, if there is a will by the people to transition to electricity generation primarily through renewables, we could afford to do it. But not for the developing countries, in a realistic outlook. And the wealthy countries make up only around a billion people.

    Buffett through Berkshire Hathaway Energy is into investing huge sums into renewables, such as solar. A big part of that renewable energy push by them is also into natural gas fired power plants. These are power plants that are going to be running for decades. You don’t make huge capital commitments like investing into new power plants if you don’t foresee that the energy source you will be using (natural gas=hydrocarbon) is going to be around and profitable for many decades to come.

    I don’t think anyone can predict what’s going to happen in the future to any precise degree. It’s my subjective opinion from my understanding of the world that it will more than likely that hydrocarbons will continue to play a major role in the world, climate change be damned.

    I don’t have a huge stake of the overall portfolio in the oil super majors, but I would have no issue holding a bigger share and be able to sleep soundly at night. Are you familiar with what happened with cigarette companies in the US? They were perpetually undervalued because of litigation issues and the public turning against the product. And because the stocks was perpetually undervalued, you could’ve bought them at depressed prices have been rewarded handsomely for continually reinvesting dividends back into underpriced shares. I’m not saying that it would play out exactly the same in the case of hydrocarbons, but it is an interesting case study to keep in mind.

    If all these funds and countries start pulling out investments from coal, oil, and gas companies, that will depress the value of the shares and I would not hesitate to swoop in and back the truck up to shovel shares into my accounts if the economics made sense relative to the price you were paying. I would have no issue with this because these companies exist to provide a service to civilization, whether we like it or not from our biased moral reference point.

    One couldn’t deny that the Exxons and Chevrons of the world exist to fill a demand that we as species demand: cheap energy. Every company exists to fill something civilization demands, whether we on an individual basis like it or not. We collectively as a species demand that these companies exist.

    Sorry, I’m afraid this is getting long and a tad rambly – I hope it makes a little sense. My dinner is getting stone cold on the counter as I have yet to stop regurgitating my thoughts here. I appreciate the question and hope you have more questions to my answer as this makes me think more about my position, the strengths and weaknesses. I’m always willing to change my thesis if the evidence sways me enough.

    Let me know if you need any clarifications – dinner time now!

    1. Awesome reply, and sorry it made your dinner get cold! 🙂

      You make some very good points, especially about the parallels between what might happen or already be happening with HC companies and cigarette companies, and about all of the other products that are derived from HCs. I look around me and there are tonnes of plastic and chemical based products, to replace all of those would take some going. However looking miles into the future when oil extraction does finally become too expensive, I have no doubt we’ll find materials to do so, although that is not relevant to this discussion as I can’t see peak oil happening any time soon despite what many people have said on the subject.

      I’ve just read your post on morals and investing… another great post! I have to say I don’t have much to add to the discussion on that one as I am yet again a bit of a fence sitter. I invest in index funds so no doubt will hold some cigarette and energy and whatever else companies, but I don’t think I’d ever go out of my way to invest in them directly but that is probably just 80% laziness and 20% on moral grounds. If I thought the companies happened to be severely undervalued then I guess I will just have to miss out on all the fun (and potential profit!) 🙂 but to be honest I can’t ever see the point where I will be interested enough in individual share purchasing to have the conviction about any particular companies value anyway so, conveniently I won’t ever have to worry about that 😀

      As you can see through my lens of someone who is never going to invest in these companies directly it is much easier for me to think of reasons not to invest in them than to invest in them, so I guess that’s also biasing my opinion!

      I think as I mentioned in another post, I asked an oil company worker friend for comment on all this sort of stuff an he has pretty much the same views as yourself on HCs, we are too reliant on them for them to be going anywhere soon. He also dropped a bit of a bomb and said that most in the industry view the carbon emission reduction goals as impossible to hit. I mean I know a lot of people including scientists are already saying it’s too late but to hear it from the horses mouth is interesting. I guess you could argue that his view is tinted by the fact that he needs HCs to stay relevant to keep him in a job so there is a mild amount of, what… wishful thinking?! in there but I trust that this guy has sound judgement and he would be honest and tell me if he thought the future looked grim for his job prospects.

      Anyway, as already stated, for me it’s yet another sit on the fence and leave it well alone job 🙂

      Cheers!

      1. I find index investing interesting from a moral and ethical point of view because all an index fund is is a collection of individual stocks. So an indexer actually has chosen individual stocks, just weighted to whatever formula based on whatever index.

        For example, if you own Vanguard’s S&P 500 index fund ETF (VOO) you have consciously (or perhaps unconsciously) made the decision to purchase shares in 500 of the largest companies in the USA. Sure you own fractional shares based on the formula for how the index is held, but if you think it through, you have made the decision to purchase individual companies. It doesn’t seem that way because it is obfuscated by this product called an “index fund” but an index fund doesn’t really exist: if you go back far enough, it’s just a collection of individual companies.

        Philosophically, an indexer is just saying “I don’t want to pick and choose based on value investing or charting or whatever, I just want to buy all the companies and not think about it.” That in itself is picking and choosing what investments you make – it’s just that you pick and choose all of them based on a weighting formula, and it gets packaged and sold in a neat little box.

        If someone bought you a dozen donuts, placed them in a box, and gave them to you, they are still donuts. Rather than picking and choosing the donuts yourself, you just told the baker to select one of each 12 donuts they carry and put them in the box.

        So it’s interesting that many people who index but also hold strong moral positions, are somehow fine with indexing (I’m not saying that this is you, just making a general statement) like that because they are one degree of separation from the selection of the companies, that washes away the sins of some of the morally reprehensible companies that are included in the selection.

        My friend who is a very committed vegan, who has strong opinions on the subject and thinks it is very important moral issue, seemingly finds it ok to purchase mutual funds that hold – in all probability – slaughterhouses. I mean… I find that very surprising. This is someone who is very active in trying to convert people to veganism because he thinks it is one of the most important things he can be doing with his life. He’s a vegan activist and has confided he may want to do undercover stuff in slaughterhouses to expose cruelty to animals. Yet… his excuse for not selecting his own investments based on his moral position is…. fascinating. I was told it would be too difficult to learn how to do, and besides he has no interest in finances and investing.

        I just find it interesting. In my opinion, it’s a huge contradiction. I would imagine if one felt so strongly about something, they would try to be as consistent as possible. Nothing rubs people the wrong way than holier than thou attitudes that aren’t backed up. If you are going to be telling people what to believe and how to live their life, you better damn well be walking the talk.

        Anyways, do you find it a bit contradictory that you hold stakes in a plethora of companies you would not support based on your values? Does it really make it ok that just because it is a step removed from you actively purchasing the companies, that it is fine? These aren’t meant to be aggressive questioning directed at you – it’s just me thinking out loud.

        Let me know what you think.

        1. Hi KL,

          I agree that holding index funds and having opinions on specific companies inside of those is contradictory, even hypocritical.

          However it goes back to the point that you, yourself made rather clearly, on the other thread we had going 😉

          There is only a certain amount of time in your life to devote to any given activity and going through individual investments and finding ones that are both good and ethical is not something I want to waste any of my time on, as it will have little impact in changing the way those companies work anyway, IMO.

          I think lobbying companies and politicians directly to enact change is a far better use of my time as well as not buying the products from companies I disagree with (I think lower sales will hurt a company more or at least equal to the very small drop in investment capital me not investing in them via index funds would produce)

          I presume your vegan friend thinks his time is better used evangelising the benefits of veganism to everyone who cares to listen. And let’s compare spending 10 hours a week working out how to not invest in a slaughterhouse compared to doing some sort of undercover work, if that really took off and got lots of attention, you can see where the most impact will be made for his cause. It might be pie in the sky but if he starts really working on it then fair play to him.

          By your own standards, he is simply living his life on his own terms and not wasting time where he deems hardly any impact will be made, so I don’t think you should find it all that surprising that he doesn’t spend time learning how to invest.

          With regards to walking the walk and holier than thou attitudes, I do agree with that statement to a certain degree and it can be annoying. But I think people need to see the bigger picture. It’s like when people moan about politicians flying to the summit on climate change in Paris. I mean come on, get over it! See the bigger picture and that the overall amount of good being done far outweights the bad! If everyone today who had any kind of environmental concerns (for example) was held up to such high standards then nothing would ever get done. As long as we are all moving in roughly the same direction though, then I for one am happy.

          Going back to your vegan friend, let’s take (his?) argument to it’s logical conclusion and say he becomes some sort of vegan second coming, and a large majority of people convert to it. Theoretcially the slaughterhouses would go out of business or at least drop out of the S&P500 and therefore he wouldn’t be invested in them anyway. So both means achieve the same ends but one of them has a much larger upside so I can see why he thinks that way (however unlikely that may actually be).

          This has been a great discussion and really interesting but I will say shall we just end it here?
          Because I am sure we both have better things to be doing with our time… 🙂

          Thanks again!

          1. I’ve really been enjoying our back and forth.

            What you say above is absolutely fair. I’m just nit picking at the details to see what comes out as a response. And the discussion has been great.

            Sure, let’s leave it at this, but if you ever have something come up, just post again and we’ll see how far we take this back and forth comment thread 😉

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