I had a similar issue with this. It seems that the settings file it is looking for is located in the directory you are trying to run the demo from, not the settings file in the directory the run.py file is. I had good luck with changing the working directory in the command prompt to the directory the demo was in (using the cd command).
I think the demos sometimes (or some of them) try to create the settings file if they can't find it. That seems nice, but when I was trying to run the demos from the start menu, they didn't have write access in the directory they were in and so failed until I ran them with Administrator privileges. After running them as Administrator once, they created the settings files and I could launch them normally. Same with the map editor.
Not sure if that would work for you, but it sounded similar to my frustrating problem.