The Great Energy Rebalancing: Why Energy Demand Will Outpace Supply for a Decade

Few sectors have provoked as much debate—and investor whiplash—as energy over the past decade. The 2008 financial crisis triggered volatility. The shale revolution created underperformance. The energy transition narrative created moral ambiguity. The result: energy has underperformed the broader market for years, and many investors have simply abandoned the sector in pursuit of "safer" technology and healthcare returns.

But looking back on four oil price cycles, two financial crises, and multiple geopolitical disruptions, we are entering a multi-year period where energy supply will struggle to keep pace with demand, and valuations will reward that mismatch.

The Demand Story Is Structural

Let's start with demand, because this is where most investors get the framework wrong.

The conventional narrative—"peak oil demand," "the death of fossil fuels," "renewable energy will eliminate energy scarcity"—has captured policy conversations and ESG mandates. But the data tells a different story.

Global energy demand is rising. By 2030, total primary energy demand will grow roughly 1.5% annually, driven by:

1. Electrification in developing markets: China, India, and Southeast Asia are industrializing. That process requires energy—lots of it. China alone is adding roughly 200 million people to middle-income status by 2030. That's increased electricity consumption, increased transportation demand, increased manufacturing.

2. Data center and AI infrastructure: This is where the truly explosive growth exists. Data centers consumed roughly 4.4% of U.S. electricity in 2024. By 2030, that figure approaches 9%. Each data center requires hundreds of megawatts of continuous power. AI queries consume six to ten times the electricity of traditional internet searches. That's structural demand growth, not cyclical.

3. Grid transformation: The U.S. power grid is aging. Over 70% of grid infrastructure exceeds 25 years old. Modernization requires both electricity (to operate new systems) and the raw materials and construction energy to build that infrastructure.

The Supply Story Is Constrained

Now here's where the real opportunity emerges: supply is not keeping pace, and structural factors ensure it won't for a decade.

U.S. onshore production is in structural decline. The Permian Basin—which accounts for the majority of recent U.S. production growth—has seen rapid depletion. Well productivity is declining. Costs are rising. Shale oil production peaked in late 2023 and has declined by roughly 200,000 barrels per day since then. That's not cyclical underinvestment. That's depletion.

Global OPEC capacity is tighter than publicly understood. OPEC+ recently approved a comprehensive audit of spare production capacity—the first full audit in decades. Market signals suggest OPEC spare capacity may be substantially lower than previously projected. That changes energy geopolitics materially.

Renewable energy cannot fill the gap in any reasonable timeframe. We're not anti-renewable by any means, the transition is not about one or the other; it's about managing both simultaneously, but here's the math: renewable energy provides roughly 13% of global electricity today. To replace fossil fuels at scale would require replacing not just electricity generation but also transportation fuels, heating, and industrial heat. That's a 15-20 year transition, minimum. In the interim, fossil fuels remain essential.

The Geopolitical Wild Card

Venezuela re-entered the energy conversation in 2025. The country holds roughly 303 billion barrels of proven oil reserves—roughly one-fifth of global supply. If U.S. policy successfully facilitates increased production there, it could add meaningful supply by 2027-2028. But that's conditional on political stability and continued U.S. engagement. It is not a certainty.

Simultaneously, sanctions on Iran, ongoing tensions in the Middle East, and Russia's continued isolation from Western markets all constrain supply from traditional sources.

The net result: geopolitical risk remains elevated, and that risk skews toward higher energy prices.

Where Energy Valuations Are Compelling

After a decade of underperformance, energy equities now trade at valuations that haven't been seen since the 2015-2016 oil crash. Major integrated oil companies trade at single-digit price-to-earnings multiples with dividend yields exceeding 3-4%. For investors seeking yield with genuine structural tailwinds, that's compelling.

The Valuation Factors

What makes right now compelling is not just energy fundamentals. It's the combination of tight valuations (single-digit multiples, high yields), structural demand growth (electrification, data centers, developing markets), supply constraints (U.S. depletion, OPEC uncertainty, geopolitical tensions), and policy support (both Democratic and Republican administrations acknowledge energy security needs).

The Practical Approach

Energy should not be speculative. But for a 5-10 year time horizon, a 5-10% allocation to energy equities and midstream infrastructure—focused on high-quality operators with durable cash flows and disciplined capital allocation—offers return potential with genuine structural tailwinds.

The conventional wisdom has written energy off, but from our experience we've learned that the greatest opportunities often emerge when an entire sector has been dismissed. Energy is at that inflection point.