21st Century Investment Themes


The energy complex: Meeting the world’s energy needs

At a glance:

  • Economic expansion and population growth are putting pressure on resources
  • The concept of "peak oil" is overstated but governments understand the need to move away from finite fossil fuels
  • A higher oil price is supporting the exploration of previously uneconomic fields
  • The move to decarbonisation, renewable energies and bio-fuels will take time
  • Carbon capture could offer short-term hope by cleaning up energy from fossil fuels
  • There will be winners and losers (at both the country and corporate level) from this changing energy landscape.

Our demand for energy is immense and growing. World energy consumption in 2008 stood at 11,294.9 billion tonnes of oil equivalent, a growth of 195.6% since 1965. On average, each American currently consumes 11.4 kW of energy a year, compared with 1.6kW for each Chinese person and 0.7kW for each Indian. With China and India representing over a third of the world’s population, their rapid development is set to increase energy consumption significantly in the coming years.

However, there are two related problems that will affect energy use in the years ahead. First, there is the finite supply of (and the unwanted dependency upon) fossil fuels, such as oil and coal. Second, there is climate change.

chart 1

“Peak oil” pressure?

It is well understood that fossil fuels are finite, but the quantity that remain is a matter that polarises opinion. Some argue that we are close to reaching a peak oil” situation, after which oil supply will decrease and global growth will be constrained. Others are more optimistic. In fact, most of the apocalyptic projections made by peak oil theorists have been debunked, as they tend to underestimate the amount of oil in the ground.

Nevertheless, the fact remains that we are burning through a lot of our proven oil supplies. This means energy companies are turning to less-accessible areas in order to satisfy demand, such as deep sea deposits, sands oil and shale gas. Although the cost of extraction is significantly greater, the higher oil price makes these marginal fields economically viable. Higher-cost deposits, such as those in the oil sands of Canada and off the coast of Brazil, will significantly boost supply and calm fears over “peak oil”, but will also put upward pressure on the price of a barrel.

Geo-politics also plays a part when it comes to “less accessible” fossil fuel deposits. Many of these resources are found in less politically stable regions (such as Venezuela and Nigeria) or in areas where there are competing claims (for example, under the polar ice caps or in the Falkland Islands).

The perils of energy dependency

Much of the world is dependent on a handful of resource-rich nations. The EU 27 countries, for example, had an aggregate energy dependence of 53.8% in 2008 (which means that more than half the energy used in the EU is sourced from elsewhere). Some countries, such as Ireland, Luxembourg, Cyprus and Malta import over 90% of their energy. Fossil fuel hegemony rests with a small number of deposit-blessed nations, such as the Gulf states and Russia. Russia supplied 33% of oil imports and 40% of gas imports to the EU in 2008.

chart 2

As we shift away from fossil fuels towards renewable energies, this axis of energy power will diminish and new winners will emerge. These are likely to be companies rather than nation states.

Barriers to change are weakening

In the energy sector, it takes an average of 25 years for a new production technology to become widely adopted. This is because of the need for new infrastructure.

Displacing oil, and the significant investment in infrastructure that supports it, will take even longer. The limited penetration of natural gas (which is superior to oil in many respects, as it is more efficient and environmentally friendly) illustrates the difficulty of a transition to a new fuel. However, the appetite among governments and businesses is growing, as they look to reduce their dependence on a dwindling fossil fuel with a volatile price. The greatest possibility for a transition away from oil comes in the shape of better renewable sources (such as solar and wind) alongside improvements in battery technology that would support the wider use of electric products.

Climate change

Although there are still plenty of sceptics, governments now recognise climate change as a problem that needs to be addressed. Hundreds of billions of dollars are being spent yearly in the name of combating climate change, providing excellent investment opportunities for the practitioners who can identify the winners at the corporate level. The potential market is massive.

The economics of efficiency

As it will take time for renewable technologies to achieve the necessary scale and infrastructure to challenge fossil fuel, the short-term focus will be on increasing the efficiency of existing technology. Developing economies are particularly extravagant in their use of energy, compared with Western nations, so straightforward efficiency gains are possible. China’s 2006–2010 five-year plan aims to increase energy efficiency by 20%. This will help to cut costs and reduce emissions.

Of course, many firms have already woken up to the benefits of efficiency. Shipping giant Maersk has recently been highlighting the environmentally-friendly side of its new E-class container ships. This might seem strange, as the ships’ engines burn fuel at 16 tonnes an hour. However, the ships are 20% more efficient than older designs, despite being much bigger.

The rise of renewable energy

Efficiency gains in the use of fossil fuel energies are short-term wins. In the longer term, we need to make a large scale transition to a decarbonised world, based on renewable sources of energy. Governments worldwide have realised this for some time and, as a result, have been using both the carrot and the stick to incentivise industry and accelerate the transition.

While this bodes well for the long term, there is evidence that investments in green energy will be profitable in the short term too. McKinsey estimates that renewable energy will constitute the vast majority of new capacity added in the EU and US within the next decade (as chart below shows). The figure is lower in percentage terms for China, but it still constitutes a significant expansion. Although costs will run into trillions of dollars, the pay-offs could be equally large.

Looking further ahead, the European Union’s leading power companies have set themselves the goal of producing all of their electricity carbon free by 2050. There will be a range of winners and losers in this transition. Certainly, the companies which supply the components for wind and solar farms have a significant opportunity to expand and grow their earnings.

New capacity build 2020

Hydro-electric and nuclear

Of the traditional renewable energies, hydro-electricity is the most prolific at present. It represented 19% of the world’s generated power in 2008, according to Platts. However, it offers limited scope for expansion because of a lack of suitable sites and the cost involved in developing them.

The story is similar for nuclear energy. While it is set to grow in coming decades, with many plants already under development, there are issues that hold it back, such as the scarcity of uranium, the difficulty of enriching it and the fears over radioactive waste. With existing plants being decommissioned, nuclear is unlikely to expand far beyond the 9% of global energy it currently produces (based on figures as at 2008).

Wind power

Wind energy is more promising, as it can be produced wherever wind speeds are great enough. At present, this is most economically viable on land, which stands expansive nations such as America in good stead. Wind farms can also be located offshore but the cost of doing so is roughly three times greater than onshore.

While significantly cheaper than solar, wind still struggles to compete in price terms with coal and gas. However, significant government stimulus and cost-cutting technical advances should see it grow a great deal in the next decade. It is not only energy and installation companies (such as Vestas Wind Systems) that may benefit, so could the companies which produce the parts needed for each turbine.

Wind power

Solar energy

Solar energy is equally promising. As a “free” energy source, the purchase and installation of panels represents the only significant cost. Although solar was traditionally considered uneconomic, the EU Energy Institute has forecast that solar panels will be cost-competitive with energy from the grid for half the homes in Europe by 2020 – without a subsidy.

It has a long way to go before it matches at-source prices, which are much lower than end-user grid prices, but it is rapidly heading in the right direction. This bodes well for companies such as JA Solar and First Solar. It could also be good news for China, which is the world’s leading solar-panel exporter.


Bio-fuels, produced from organic renewable sources, are already being widely developed. The problem is that the fuels distilled from crops often take as much energy to manufacture as they produce, which makes their environmental benefit negligible. Equally, the current use of bio-fuel is constrained by land use, water availability and competition from using those resources for the production of food.

However, there is significant promise in the form of algae-based fuel production (as it can grow quickly on non-arable land) and investments in this field may pay dividends in the future.

A transport solution

Decarbonisation will be an important theme in the coming decades, but it will be significantly more effective if it is combined with another shift: the electrification of transport. Electric cars are here already. Unfortunately, the infrastructure required to support them is not and there are problems with battery life.

However, these problems are not insurmountable and the next few decades should see fast growth in electric vehicles and hybrids. This does not mean that electric transport will be competing with conventional cars and haulage, but it should not be long before electric vehicles become a much more significant and credible player in the transportation market. Governments and industry are investing in infrastructure, so pioneering companies have the potential to make considerable profits for their investors.

Carbon capture

The decarbonised energy sources we have mentioned offer significant hope for the future. However, in the short term to medium term, fossil fuels will continue to be significant players in the energy industry. To mitigate the environmental impact, a rapid development of nascent carbon capture technology is required.

So far, this has not developed enough to be cost effective on an industrial scale and significant investment is needed. But it has the potential to help in the battle against climate change. A successful deployment of clean coal technology could pose a major challenge to oil energy markets, and is likely to be championed by coal rich/oil poor nations. For those governments and companies that make the investment, the potential rewards are great. Localising energy production As green technologies become cheaper and more accessible, they will continue to proliferate beyond commercial use. This could lead to “localisation” of energy production, with individuals generating the energy they need and selling surpluses back to the grid. Combined with large green developments, such as batteries of solar panels and wind farms, this could mean fewer power stations in tomorrow’s world.

A few “wild cards”

There are also a few experimental technologies that could offer potential if they get off the ground. They include solar power plants in the Sahara desert, nuclear fusion and a space station that beams solar energy to Earth in the form of microwaves. Billions of dollars are being spent to research these “wild cards”, as successful development could create immense wealth and shift global power balances.


The evolution of the world’s energy production will be inextricably linked to the path of global growth and the balance of global power in the coming century. The investment opportunities that will accompany this story are likely to be significant and diverse. Many of the themes can be invested in now. Some of the innovations that look set to grow exponentially in coming years already benefit from substantial foundations. It is clear that there will be winners and losers from the changes in how we get our energy. Rigorous research and analysis will be crucial in identifying the beneficiaries. Those who understand and anticipate the wide-ranging implications of the themes we have discussed, and spot the beneficiaries before the market, will prosper. Few industries are likely to produce as many companies with significant earnings growth potential as the energy industry in the coming decades. The possibilities are electrifying.

Important information

The value of an investment can go down as well as up so you may get back less than you invested. Reference to specific securities should not be construed as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. This information does not constitute investment advice and should not be used as the basis of any investment decision, nor should it be treated as a recommendation for any investment.