Growth in AI and data centres is driving higher electricity needs even as economies become more energy efficient.
Despite the energy transition, global economies still rely on fossil fuels, making them vulnerable to energy price shocks.
Many economies are growing while carbon emissions are stabilising, showing that economic growth can be increasingly separated from fossil fuel use.
The Middle East conflict is reminiscent of the 2022 energy shock when Russia invaded Ukraine, which caused rapidly rising energy costs and high inflation globally. While the economic conditions are different today, the important question remains: what do recurrent conflicts in major energy-producing regions mean for long-term trends?
Periods of disruption, as seen in energy markets over the past five years, can either reinforce or unwind existing trends. In this case, ongoing geopolitical volatility and the weaponisation of energy markets appear set to reinforce the political desire to pursue greater energy security and independence.
As the Middle East conflict nears its two-month mark, oil prices continue to fluctuate, hovering around $100 a barrel. Higher oil prices directly impact consumers at the petrol pump and push up energy costs. Yet the broader economic implications are more complex than these short-term effects suggest, because the amount of oil required to generate growth has changed significantly.
Advanced economies have shifted from being heavily industrial- and manufacturing-driven in the 1970s, to being far more energy efficient today. This is due to a combination of technological improvements, stricter fuel standards and a shift toward less energy-intensive industries, such as finance, healthcare, education and technology. As such, far less oil is required to produce the same unit of economic output – research shows that the amount of oil needed to produce a unit of economic output has fallen by roughly half since the 1970s.1
For many years, developed economies grew through service and technology industries that needed relatively little additional energy. As a result, energy demand stayed relatively flat even as economies expanded.
However, a fresh phase of energy demand is now emerging. The rapid growth of power-hungry technologies such as AI and the proliferation of data centres, the shift towards electrification and the need to rebuild ageing infrastructure together mean that energy demand is rising again.
The world has become more electrified, but oil and gas remain critical to global economic activity and will do so for decades. Oil price shocks and supply disruptions therefore still ripple through economies, posing an important question: can economies decouple growth from energy commodities that are still vulnerable to political disruptions?
Renewable energy markets experienced a perfect storm in 2022: fossil energy companies were generating significant amounts of cash, while many renewable energy developers – which were building solar farms, wind projects and battery storage facilities – faced challenges from higher interest rates and rising construction costs. Nuclear energy, seen as too politically sensitive to expand quickly, remained on the sidelines.
Renewable energy deployment had been expanding rapidly leading up to 2022. Very low interest rates made it cheap to borrow money to build new solar and wind projects, and long-term contracts to sell electricity at fixed prices gave investors confidence that they would see steady returns. But rising interest rates and construction costs meant that certain renewable projects, that had started quickly or were inefficiently designed, were more expensive and less profitable than expected. Investors became more cautious about investing in new projects.
For renewables, it was reminiscent of the dot-com boom of the early 2000s – the market was right about the trend but wrong about the price. Take Microsoft. If you invested in Microsoft in 1999/2000, you would have had to wait around 17 years for your shares to return to 1999/2000 levels. Microsoft’s revenues went from under $20 billion in its 1999 fiscal year (FY 1999) to over $90 billion in FY 2016, showing that being wrong about the valuation does not mean you are wrong about the trend. In other words, valuation cycles can obscure structural change.
Today, interest rates have adjusted, and investors now have a clearer picture of project costs and expected returns for renewable projects. Renewable energy developers are also using contracts that allow them to adjust electricity prices if costs rise, helping protect profitability. In addition, renewables remain among the most cost-effective energy sources, and projects can be built faster than almost any other type of power generation.2
The global economy will continue to rely on oil and gas for many decades, as transforming the energy system will take significant resources and time. Oil and gas fuels transportation, including airplanes, ships and long-haul trucks, and they remain essential in steel, cement and chemical manufacturing. Natural gas also provides heating for homes and businesses and is used to produce fertilisers that feed the world. Replacing these with low-carbon alternatives will take years as it requires new technologies, infrastructure and careful planning to avoid economic disruption.
We are not advocating abandoning fossil fuels – doing so too quickly could harm millions of people and disrupt economies. However, recent events in the Middle East are reinforcing a trend known as the “Great Decoupling”, where economic growth is becoming less tied to carbon emissions. This trend is already underway. Recent analysis from the Energy and Climate Intelligence Unit found that between 2015 and 2023, almost all the world’s largest economies – representing 92% of global economic output – have grown without increasing their carbon emissions at the same rate.3 In some cases, emissions have fallen while economies expand.
Europe felt the full impact of the 2022 energy shock, as the continent had at times sourced around 40% of its gas from Russian pipelines before the invasion. In response, the European Union sought to diversify supplies through liquefied natural gas (LNG) imports and new energy partnerships while accelerating efficiency measures.
Today, Asia is facing the strongest effects of the energy shock caused by the conflict in the Middle East. As Asian nations work to protect their economies from supply disruptions in critical commodities, the shift to domestic low-carbon energy is becoming less of an environmental goal and more a matter of national security. Asian countries are investing in wind, solar, hydro, nuclear and battery storage while also diversifying imports and building strategic reserves.
This is more than a change in fuel sources; it signals a broader structural shift consistent with the Great Decoupling. We believe that recurrent oil and gas shocks will reinforce the political appetite for more domestic low-carbon energy supply from wind, solar, geothermal, nuclear and battery storage.
For investors, this points to a more complex, but also more diversified, energy landscape. Energy is no longer simply a cyclical input cost; it is becoming a central driver of long-term structural change across economies, industries and markets. Understanding these shifts in energy security, technology and policy will be increasingly relevant when assessing risks and opportunities over the coming years.
[1] Organisation for Economic Co-operation and Development
[2] Renewables overtake coal as world's biggest source of electricity - BBC News
[3] Energy & Climate Intelligence Unit | 10 Years Post-Paris: How…
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