How the spiraling Iran conflict could affect data centers and electricity costs

Shortly after the Trump administration launched war on Iran, I called Reed Blakemore, director of research and programs at the Atlantic Council Global Energy Center, to talk about the consequences. While oil and gas prices were already rising, there were still greater expectations that the impact of the conflict might be short-lived. At the end of our conversation, Blakemore said bluntly: “Let’s call again [next week] … We’ll have a much clearer picture of what the conflict is going to look like and what the story is really going to be for the energy going forward.

This is a week later and the conflict has escalated since the US and Israel launched attacks against Iran, following the assassination of Supreme Leader Ayatollah Ali Khamenei. Energy infrastructure has become a major leverage point in this war, with Israel targeting Iranian fuel depots and Iran targeting the oil and gas infrastructure of its Gulf neighbors in its attacks. Iran’s paramilitary Revolutionary Guard threatened on Tuesday that “not a single liter of oil will be allowed to be exported from the region to the enemy and its allies until further notice.” Iran has also reportedly begun laying mines in the strategic Strait of Hormuz, through which a fifth of global petroleum consumption and liquefied natural gas (LNG) trade passes.

I spoke with Blakemore again today about how Iran’s continued hold on the Strait of Hormuz impacts energy costs and the rush by American tech companies to build energy-hungry AI data centers.

This interview has been edited for length and clarity.

What is your view now on what impact the conflict is likely to have on oil and gasoline prices?

Reid Blakemore: The fundamental issue at the moment, 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.

At the beginning of the conflict when we saw that insurance premiums were increasing for these ships, we were talking broadly in terms of, Hey, it’s become too expensive for a ship to travel across the Gulf and so they’re staying out.

We have moved on to real concerns about the safety of passing through the strait in the first place, so it is no longer an issue of insurance cost as much as it is an issue of safety and security.

We have virtually no traffic passing through the Strait of Hormuz. Many countries have started stopping production. So this impact is already emerging as the market and fundamentally tankers are fundamentally concerned about whether they will be able to pass through the strait safely.

The other characteristic that I think we’ve seen the market react to strongly over the last several days is how long this struggle is going to last. And I think you can look at the President’s comments and the market’s reaction over the last 72 hours as a prime piece of evidence in that regard. Heading into the weekend where the operation had clearly escalated, uncertainty about how open the Strait of Hormuz would or would not be began to reach its peak. The reaction in Asia at the market open on Sunday, which went from $100 a barrel to almost $120 a barrel, is not really a feeling in the market that this will be over any time soon. The pushback that we saw yesterday was basically in response to what the President said Hey, we see the end of this struggle.

The United States is a major oil producer. I think the strategy of American energy dominance played an important role in protecting American consumers from the early market consequences of the decision to go to war with Iran. The price increase we have seen so far may have been much more responsive to market volatility. This has bought the administration some time as it relates to how long it will take until we actually see gasoline prices rise domestically. But as this conflict continues and market volatility continues, we will sadly begin to see upward pressure on gasoline prices over time.

American energy dominance can only do so much to protect American consumers from a globally traded market in terms of oil. Since the United States is a major domestic oil producer, it has the ability to exert some upward pressure on its own gasoline prices.

But because it participates in the global market through its oil exports, it has an impact on the volatility of the global oil market.

Can we expect electricity prices to also increase? Why?

For the United States, the gas story is a little better, but the global market is no stranger to it either. There is large-scale regional trade of natural gas within the United States. The US is a major producer of natural gas for domestic consumption which drives this. This makes the case of the United States very different from the gas price sensitivity that we are seeing in Europe or Japan or other parts of East Asia.

The problem is similar to the oil story because the United States is a major LNG exporter. As natural gas prices rise elsewhere, LNG exporters will be incentivized to export more gas because that is where the arbitrage opportunity is, and this will create upward price pressure domestically in the United States.

What risks does this pose to tech companies and does it push to build more AI data centers and related energy infrastructure?

In the United States, most data center buildouts have begun to be powered by natural gas. We will not see electricity prices in the United States reach crisis point in the short term due to this conflict. The time frame we’re talking about for gas and therefore electricity prices is likely to be in the time horizon of months rather than the weeks you would expect in the case of oil.

However, the longer this conflict goes on and the more tightness we see in the global gas market – that will eventually spill over into the United States and put a kind of upward pressure on gas prices which will then impact electricity prices and then bring up the data center question.

I think what’s unique is that it doesn’t necessarily impact the ability of data centers to buy energy. Electricity costs are a relatively marginal proportion of the cost of building and operating a data center. What this does is that it only further exacerbates the energy affordability challenges that are currently plaguing the social license for data centers in the country. Therefore, the impact on electricity prices will not have any direct impact on data center buildout. The resulting affordability challenges will further increase popular dissatisfaction with data center construction, as data centers drive consumers’ electricity bills more expensive.