Heated debate: tighter government budgets due to the financial crisis are already having repercussions on spending on subsidies for renewable energy.

Three years ago, energy investment plunged in the face of a tougher financing environment and weaker demand for power, as the worst recession since the second world war took hold.

The recovery has been uneven, but global primary energy demand rebounded, up 5 per cent in 2010.

Today, the eurozone crisis and fears over the US’s indebtedness have once again put energy executives on alert. As governments implement tough austerity measures, executives are watching closely whether the weakening economic outlook in the west will affect demand and curtail investment plans.

Policymakers are under pressure to ensure energy bills remain affordable.

So far demand has held up, thanks to the unquenched appetite from the emerging economies of Asia, Latin America and the Middle East.

Executives struck a bullish tone at a conference in London in October, insisting pessimism about energy demand was misplaced.

“We are looking at things as westerners,” said Christophe de Margerie, the French energy group Total’s chief executive. “In the east, they don’t have the same feeling,” he added, noting that emerging economies were still showing underlying growth, fuelled by basic needs such as providing electricity.

The International Energy Agency (IEA) echoed a similar view in its World Energy Outlook published in November, predicting that over the next 25 years, 90 per cent of the projected growth in global energy demand will come from non-Organisation for Economic Co-operation and Development member countries. China alone is expected to account for more than 30 per cent.

The balance sheets of big oil also remain robust, underpinned by this year’s high crude prices.

ExxonMobil, the world’s largest quoted oil company, said in October that its capital and exploration expenditures of $26.7bn for the first nine months of the year was a record, as it sought to take advantage of the nearly 50 per cent rise in oil prices from a year earlier.

However, while global demand has held up despite the weakening economy, supply remains tight. The disruptions to production in north Africa and the Middle East in the wake of the Arab spring, notably in Libya, have helped underpin a stubbornly high oil price. Disappointing production from non-Opec countries such as Russia have exacerbated the situation.

“This year will be the first year ever with an average annual oil price above $100 a barrel. In real terms, this is the highest price since 1864,” points out Christof Ruehl, BP’s chief economist.

“The break-even price for government budgets in most producing countries has also gone up, as governments need more money to balance their budgets, and to help pay for increased social packages,” he adds.

Of the large economies, the US is the most vulnerable to high oil prices. Unlike the European Union, Japan or China, which can increase their exports to producing countries, the US exports relatively little.

“The net impact on its trade balance would be the highest,” says Mr Ruehl. “US consumers are on track to spend roughly $200bn more on oil this year than they did in 2010 because of higher crude prices.”

Longer term, too, there are worries. Fatih Birol, IEA’s chief economist, has warned that more than 90 per cent of growth in oil production needs to come in the Middle East and north Africa because of the decline in output from fields in other parts of the world.

However, recent political developments in the regions could lead to “under-investment” – and consequently even tighter markets and higher prices.

The state of the economy will be among the factors taken into consideration when members of oil-producing nations meet in Vienna in December and industry executives will be watching closely for any signals that a potential increase in production in the coming months may be on the cards.

A Goldman Sachs note that was published late in November says: “Despite the notable slowdown in global economic growth, we continue to expect that oil demand will grow well in excess of production capacity growth.

“In our view, it is only a matter of time before inventories and Opec spare capacity become effectively exhausted, requiring higher oil prices to restrain demand, keeping it in line with available supply.”

Tighter government budgets are already having repercussions on spending on subsidies for renewable energy.

While European governments had already begun to reduce subsidies for renewables after they had grown very quickly, the sovereign debt crisis will exacerbate the cuts.

As thousands of delegates meet in Durban, South Africa, for the latest round of UN climate talks, they do so against an increasingly tough funding background to address climate change.

Experts are warning that spending is likely to plunge by $22.5bn in the next few years, as government austerity cuts bite, and by as much as $45bn if the eurozone crisis escalates.

The report by Ernst & Young predicts that European countries will suffer the brunt of spending cuts, but that large reductions could also be made in the US and Japan.

Among the 10 economies studied, the worst hit in the short term is forecast to be Spain. Here, rigorous austerity measures suggest that the government will spend $5bn less between 2011 and 2015 on climate-change prevention than it would have done under “business as usual” conditions.

“The conditions under which the Durban meeting will take place could not be more challenging,” warns Juan Costa Climent, global climate change and sustainability services leader at E&Y.

Policymakers, he adds will be meeting “under storm clouds of austerity, a global focus on national interests, and widespread scepticism for the prospects of securing a legally binding successor to the Kyoto protocol”.

The energy world has experienced three big shocks over the past two years: BP’s Gulf of Mexico spill; the accident at Japan’s Fukushima nuclear plant; and supply disruptions because of the Arab uprisings. The repercussions are still being felt. Policymakers face the task of balancing conflicting pressures: maintaining energy security; meeting tough carbon reduction targets; and keeping energy affordable. The outlook is for more volatility.

The world has entered “an era of macroeconomic volatility – in sharp contrast to the strong growth and stability of the previous decade,” according to Simon Henry, chief financial officer at Royal Dutch Shell.

“At Shell, we expect this kind of volatility to remain a feature of the next decade and beyond, as surging demand for energy puts supplies under pressure,” he adds.