A dramatic reversal is sweeping through global energy policy as governments worldwide abandon renewable-first strategies and double down on fossil fuel production.
From the United States expanding coal mining to China accelerating coal-fired power plants and the Middle East ramping up gas exports, the shift represents one of the most significant energy policy pivots in decades.
For investors across energy markets, commodities trading, and ESG portfolios, this government-led fossil fuel expansion creates both unprecedented opportunities and complex challenges that could reshape energy investments for years to come.
Table of Contents
Key Takeaways
Navigate between overview and detailed analysisKey Takeaways
- Governments are prioritizing energy security and economic growth over climate commitments, marking a dramatic reversal in global policy.
- Fossil fuel expansion—coal, oil, and gas—is being directly supported through subsidies, favorable regulations, and infrastructure investment.
- For investors, this creates a paradox: short-term opportunities in oil & gas profitability versus long-term risks of oversupply and policy reversals.
- Renewable energy faces pressure from rising interest rates and capital outflows, while fossil fuels regain momentum as “reliable” assets.
- The global energy mix is entering a period of greater volatility, where policy shifts, geopolitics, and market cycles will heavily shape returns.
The Five Ws Analysis
- Who:
- National governments (U.S., China, Middle East) and major oil & gas corporations driving expansion.
- What:
- A global policy shift away from renewable-first strategies toward renewed fossil fuel investment.
- When:
- The pivot accelerated in 2025, fueled by energy security concerns and political decisions.
- Where:
- Key centers include U.S. coal/oil, China’s coal-fired plants, and Middle Eastern gas production.
- Why:
- Governments see fossil fuels as essential for reliable growth, geopolitical leverage, and domestic stability—even at the cost of climate goals.
The Global Policy Shift Toward Fossil Fuel Growth
The Trump administration has launched the most aggressive fossil fuel expansion program in recent memory, signing executive orders to expand coal burning and mining while promoting development across oil and natural gas sectors where the U.S. currently leads globally.
The “Unleashing American Energy” executive order specifically encourages energy exploration and production on federal lands and waters, backed by $80 billion in fossil fuel industry handouts over the next decade, including $14.2 billion worth of enhanced carbon capture subsidies.
China presents perhaps the most striking policy reversal, significantly accelerating coal-fired power plant development despite previous climate commitments. This acceleration stems from electricity market shortages that have forced pragmatic energy security decisions over environmental goals.
Chinese coal production projections have increased substantially, with the anticipated decline now expected to occur later and from a higher starting point than forecasts predicted in 2023.
Middle Eastern nations are positioning themselves as energy export powerhouses, with the region on track to become the world’s second-largest gas producing region in 2025. Production has grown 15% since 2020, while Qatar plans to expand LNG capacity from 77 million tonnes annually to 142 million tonnes by 2030. Regional gas production is projected to increase 30% by 2030, adding another 20 billion cubic feet daily.
The political motivations behind this shift reflect energy security concerns and economic competitiveness taking precedence over climate goals. National governments are providing crucial support through public infrastructure financing, financial subsidies, discounted royalties, and favorable tax regimes.
Geopolitical tensions and supply chain disruptions have reinforced emphasis on domestic energy production as governments prioritize economic growth and energy independence over environmental commitments.
How Fossil Fuel Expansion Impacts Energy Markets
Oil pricing dynamics reflect the supply abundance created by expanded government support. EIA forecasts show Brent crude averaging $74 per barrel in 2025, down 8% from 2024, with further decline expected to $66 per barrel in 2026. HSBC projects a significant oil surplus of 1.7 million barrels daily from Q4 2025, growing to 2.4 million barrels daily in 2026, creating downward price pressure despite strong production growth.
Global production increases are outpacing demand growth, with oil production expected to rise 1.8 million barrels daily in 2025 and 1.5 million barrels daily in 2026.
Meanwhile, demand growth is slowing to 680,000 barrels daily in 2025 from 860,000 barrels daily in 2024, primarily due to weaker economic outlook. This imbalance suggests inventory builds averaging more than 2 million barrels daily from Q3 2025 through Q1 2026.
Natural gas markets show different dynamics, with prices expected to rise from an average of $4.10 in 2025 to $4.80 in 2026, reflecting stronger demand growth relative to oil. Middle East crude production is expected to remain steady around 26.6 million barrels daily through 2025-2026, while U.S. production set records at 13.2 million barrels daily in 2024 and is projected to reach 13.5 million barrels daily in 2025.
Are Fossil Fuel Stocks Still a Smart Buy?
Energy sector positioning has evolved significantly, with the sector underperforming in 2024 but analysts expecting oil prices to remain in the $70-$90 range that supports corporate profitability. The sector has matured into a cash-generating machine, with many companies maintaining positive cash flow while returning capital through dividends and share buybacks rather than aggressive expansion.
Investment flows tell a complex story, with the Energy Select Sector SPDR experiencing approximately $7 billion in outflows year-to-date through 2025, making it the largest energy market ETF despite being heavily sold. Meanwhile, Utilities Select SPDR has seen inflows near $3 billion, suggesting investors prefer regulated utility exposure over volatile oil and gas producers.
The value versus growth positioning favors energy stocks in environments where commodity prices remain stable while production costs stay controlled.
However, institutional investors appear cautious about increasing exposure, preferring to wait for clearer price trends before making significant allocation changes.
Winners and Losers on the Stock Market
Oil majors are demonstrating resilient fundamentals despite mixed stock performance. ExxonMobil maintains a market cap around $480 billion with a 3.70% dividend yield, while Chevron trades with a $251-310 billion market cap and 3.90% dividend yield.
International majors like Shell and BP offer higher yields at 4.10% and 4.80% respectively, reflecting their focus on shareholder returns over growth investments.
Service companies show divergent performance patterns. Halliburton is showing relative outperformance versus Schlumberger, with the latter experiencing more pronounced bearish trends. Both companies face mixed signals from the global expansion of fossil fuel production, which should increase demand for their drilling and completion services.
Renewable energy stocks have struggled significantly, with the global sustainable fund universe enduring its worst quarter on record in Q1 2025, seeing net outflows of $8.6 billion. ESG funds have faced relative underperformance since 2022, often holding higher proportions of technology stocks while being underweight in fossil fuels and materials.
Clean energy stocks have been particularly challenged by rising interest rates that penalize future cash flows from capital-intensive renewable projects.
Investor Flows and Market Sentiment
Hedge fund positioning has shifted dramatically, with equity-focused hedge funds mostly short oil stocks since October 2024, reversing bets that dominated since 2021. These sophisticated investors are winding back shorts on solar stocks while increasing bearish positions on oil equities, suggesting they view current fossil fuel expansion as potentially creating oversupply conditions.
Retail investment flows show different patterns, with U.S. ETF flows crossing $500 billion in June 2025. Vanguard ETFs, typically representing retail investor preferences, accounted for 37% of net flows. The energy sector experienced unusual divergence between performance and flows, finishing as the top weekly performer while recording net outflows of $104 million.
ESG fund challenges reflect broader investor uncertainty about sustainability strategies.
Despite record outflows, global ESG fund assets remained steady at $3.16 trillion as of March 2025. European sustainable funds experienced net outflows for the first time since at least 2018, driven by geopolitical tensions and Trump administration anti-climate policies.
FAQ
Why are governments increasing fossil fuel output despite climate goals?
Energy security concerns and economic competitiveness have shifted political priorities away from climate commitments toward immediate economic growth.
Is oil and gas still a safe investment in 2025?
Oil and gas investments face mixed prospects. While government expansion policies support production growth, EIA forecasts show Brent crude declining from current levels to $66 per barrel by 2026 due to supply abundance.
Which sectors benefit most from fossil fuel expansion?
Oil service companies like Halliburton and Schlumberger should benefit from increased drilling activity, though performance has been mixed. Oil majors with strong balance sheets and dividend policies may outperform, particularly those with low-cost production assets.
