Iran Conflict's Shockwave: Data Centers and Rising Power Costs

The escalating geopolitical tensions threaten to significantly drive up energy prices, intensifying existing concerns surrounding the burgeoning demand from data centers.

Following the Trump administration's initiation of conflict with Iran, an initial conversation with Reed Blakemore, director of research and programs at the Atlantic Council Global Energy Center, explored the potential ramifications. While oil and gas prices were already on an upward trajectory, there was a glimmer of hope for a short-lived impact. Blakemore, however, offered a more cautious perspective, stating, "Let’s have a call again [next week] … We’ll have a much clearer picture of what the conflict is going to look like and what the story really is going to be for energy moving forward."

A week later, the conflict has indeed intensified, marked by US and Israeli strikes against Iran, including the killing of Supreme Leader Ayatollah Ali Khamenei. Energy infrastructure has emerged as a critical leverage point in this unfolding war. Israel has targeted Iranian fuel depots, while Iran has retaliated by striking the oil and gas infrastructure of its Gulf neighbors. Iran's paramilitary Revolutionary Guard issued a stern warning, threatening "not to allow the export of even a single liter of oil from the region to the hostile side and its partners until further notice." Furthermore, reports indicate Iran has begun laying mines in the strategic Strait of Hormuz, a vital waterway through which one-fifth of global petroleum consumption and liquefied natural gas (LNG) trade historically flows.

A follow-up discussion with Blakemore today focused on the implications of Iran's potential chokehold on the Strait of Hormuz for global energy costs and the rapid expansion of energy-intensive AI data centers by US tech companies.

When asked about the current outlook for oil and gasoline prices, Reed Blakemore explained, "The fundamental issue right now, in terms of the energy implications of the conflict, is how the market is reacting to the uncertainty around safe passage through the Strait of Hormuz." He elaborated that the concern has shifted from merely increased insurance premiums for ships traversing the Gulf to fundamental safety and security issues. Consequently, there is "virtually no traffic passing through the Strait of Hormuz," leading many countries to "shut in production," creating a ripple effect as tankers remain unwilling to risk transit.

Blakemore also highlighted the market's strong reaction to the perceived duration of the conflict. He pointed to presidential comments over the past 72 hours as evidence. As the conflict escalated into the weekend, uncertainty over the Strait of Hormuz's accessibility reached a "fever pitch." This manifested in Asian markets opening on Sunday with oil prices surging past $100 to nearly $120 a barrel, reflecting a market belief that the conflict would not end soon. The subsequent "pullback that we saw over the course of yesterday" was a direct response to the president's assertion that "Hey, we have an end in sight to this conflict."

Despite the United States being a significant oil producer, its "strategy of US energy dominance" could only partially shield domestic consumers from the initial market volatility. While this bought the administration some time before gasoline prices domestically surged, Blakemore warned, "as this conflict persists and the volatility in the market continues, we will begin to see upward pressure on gasoline prices, regrettably, over time."

He underscored the limitations of this domestic insulation, stating, "There’s only so much that US energy dominance can do to shield US consumers from what is a globally traded market in terms of oil." While US production can exert some downward pressure on its own gasoline prices, its participation in the global market through oil exports exposes it to international volatility.

Regarding potential increases in electricity prices, Blakemore noted that the natural gas situation for the United States is "a little bit better," though not entirely immune. The US largely trades natural gas regionally and is a major producer for domestic consumption, providing greater insulation compared to Europe or East Asia.

However, a challenge similar to oil arises from the United States' role as a major LNG exporter. As global natural gas prices climb, LNG exporters are incentivized to ship more gas abroad to capitalize on arbitrage opportunities, which, in turn, will generate "upward price pressure domestically in the United States."

Addressing the risks this poses to tech companies and the expansion of AI data centers, Blakemore explained that most data center buildouts in the US are powered by natural gas. He anticipates that electricity prices will not reach a "crisis point" in the short term, with the impact on gas and electricity prices likely manifesting over "months rather than weeks you’d expect with oil."

Nevertheless, he cautioned that "the longer this conflict lasts and the more tightness we see in the global gas market — that will eventually permeate the United States and create that upward pressure on gas prices in a way which then affects electricity prices and then that brings the data center question into play."

Blakemore clarified that the primary concern isn't necessarily the data centers' ability to purchase energy, as electricity costs are a "relatively marginal proportion" of their overall expenses. Instead, the real impact lies in exacerbating "the energy affordability challenges that are currently deteriorating social license in the country for data centers." Therefore, while direct harm to data center buildout may be limited, the "ancillary affordability challenges it will create will further entrench popular discontent with data center buildout, because data centers are simply making consumer electricity bills much more expensive."