One specific trend that unfolded last year and is likely to intensify in 2024 is the massive surge in global defense budgets. The war in Ukraine, armed conflicts in the Middle East and tensions in East Asia all contributed to a staggering $2.4 trillion of military spending in 2023, a growth of 7%.

As predicted, increased geopolitical tensions and mounting conflicts have yet to fully put the global supply chain to the test. This year, we have seen an intensified situation in the Middle East where the risks of a larger regional conflict could cast shadows over global trade, add to inflationary pressures, and impact end markets. With higher economic activity than the targets being set by central banks, interest rates may stay higher for longer and challenge financing and development costs in the energy sector. Some of the optimism many held of a better 2024 compared to 2023 is fading. Procurement arms should increase their budget escalation factors, while suppliers should worry about their sub-suppliers and freight.

One specific trend that unfolded last year and is likely to intensify in 2024 is the massive surge in global defense budgets. Yet again, the world appears to be moving into an arms race. The war in Ukraine, armed conflicts in the Middle East and tensions in East Asia all contributed to a staggering $2.4 trillion of military spending in 2023, a growth of 7%. With that figure likely to increase in 2024, global defense industry spending is now 30% higher than just 10 years ago. For the energy sector, there are already clear, direct impacts of the heightened military activity and sanctions. However, military activity indirectly impacts a dozen procurement categories and suppliers that also sit in the energy space.

Analyzing how the $2.4 trillion in military spending compares with the energy sector is interesting. The defense industry ranks higher than all energy industries in capital and operational expenditure (capex and opex) by a significant margin. In 2023, oil and gas spending totaled about $1.7 trillion, followed by renewables with around $850 billion, while grid and batteries spending amounted to about $440 billion. When looking at the challenges governments face in funding the energy transition, it is interesting to note that one year of defense budget spending could have financed more than three years of renewable capacity additions. This could significantly contribute to limiting global warming to 1.5 degrees Celsius. Additionally, comparing Russia’s military spending to its direct fiscal income from the upstream oil and gas industry, which Rystad Energy estimates to be $130 billion for 2023, provides further interesting insights.

Capital expenditures within the energy sector have been significantly impacted, particularly in relation to procurement activities. Upstream capital expenditures, for example, have come down 40% since 2014, to $600 billion. This has had a significant impact in certain categories shared with the oil and gas sector where the defense industry has become a major buyer. One notable area where this has become prevalent is within offshore operations, where the defense industry has challenged the influx of new helicopters and vessels to oil and gas and offshore energy sectors. Various countries are now investing heavily in military aircraft and vessels, with thousands of units on order or set to come on order over the coming years. As a result, the oil and gas sector faces significant challenges in securing the attention of suppliers, as defense budgets overshadow even oil and gas majors and national oil companies (NOCs).

For suppliers exposed to the defense industry, this sector also adds to high investments in the energy sector. Companies specializing in construction, equipment, or software industries, where complexity and high-end technologies are key attributes, can look toward an even better year ahead. However, controlling their logistical chains will be key. Managing delays and rerouting of logistics to avoid the Red Sea is essential. At Rystad Energy, we are now tracking the liquefied natural gas (LNG) carriers, oil tankers and specialized offshore vessels that are stuck or changing their routes. This has also resulted in an increase in freight costs, which will impact the cost of goods sold.

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