Soon after the Trump administration launched its war on Iran, I called up 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 on the rise, there was still more hope then that the impact of the conflict might be short-lived. At the end of our conversation, Blakemore said plainly: “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.”
I talked to Blakemore again today about what Iran’s continued chokehold on the Strait of Hormuz means for energy costs and US tech companies’ rush to build out energy-hungry AI data centers.
This interview has been edited for length and clarity.
What’s your outlook now on how the conflict is likely to affect oil and gasoline prices?
Reed Blakemore: 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.
At the outset of the conflict when we saw insurance premiums going up for these ships, we were largely talking about it in the context of, Hey, it’s just gotten much more expensive for a ship to traverse the Gulf and therefore they’re staying out.
We’ve moved from that to actual concerns around the security of passing through the straits in the first place, so this is no longer an insurance cost issue as much as it is a safety and security issue.
We have virtually no traffic passing through the Strait of Hormuz. A lot of countries are beginning to shut in production. So there’s already this ripple effect emerging purely because the market and basically tankers are fundamentally concerned about whether or not they will be able to safely pass through the strait.
The other feature that I think we’ve seen the market react strongly to in the past several days is a sense of how long this conflict is going to last. And I think you can look to the comments from the president in the last 72 hours and the market’s reaction as a major piece of evidence to that end. Moving into the weekend where the campaign had clearly escalated, the uncertainty around how open the Strait of Hormuz would or wouldn’t be was beginning to reach a fever pitch. The response from markets when they opened in Asia on Sunday going past $100 a barrel to nearly $120 a barrel is really a function of the market not having a sense that this would be over anytime soon. That pullback that we saw over the course of yesterday was in response to the president saying fundamentally that Hey, we have an end in sight to this conflict.
The United States is a major oil producer. I think the strategy of US energy dominance played a significant role in terms of shielding US consumers from the initial market consequences of the decision to go to war with Iran. The price increases we’ve seen thus far would have been much more responsive to the market volatility. That has bought the administration a little bit of time as it relates to how long until we see the gasoline prices really begin to pick up steam domestically. But as this conflict persists and the volatility in the market continues, we will begin to see upward pressure on gasoline prices, regrettably, over time.
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. Because the United States is a major domestic oil producer, it has the ability to put some downward pressure on its own gasoline prices.
But because via its oil exports it participates in a global market, it has that exposure to global oil market volatility.
Can we expect electricity prices to go up also? Why?
For the United States, the gas story is a little bit better, but not immune from the global market as well. Natural gas is largely regionally traded within the United States. The US is a major producer of natural gas for domestic consumption in a way that further insulates it. That makes the case of the United States much different than the gas price sensitivity we’re seeing in Europe or in 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 increase elsewhere, LNG exporters will be incentivized to export more gas because that’s where the arbitrage opportunity is, and that will create the upward price pressure domestically in the United States.
What risks does that pose to tech companies and this push to build out more AI data centers and related energy infrastructure?
In the United States, the majority of the data center buildout has begun to be powered by natural gas. We’re not going to see electricity prices reach a crisis point in the United States in the short term because of this conflict. The time horizon that we’re talking about with gas and therefore electricity prices is likely in the time horizon of months rather than weeks you’d expect with oil.
However, 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.
I think the unique thing is it doesn’t necessarily affect the ability of data centers to purchase energy. Electricity costs are a relatively marginal proportion of the cost of building and operating a data center. What it does do is it only further inflames the energy affordability challenges that are currently deteriorating social license in the country for data centers. So the impact on electricity prices likely won’t directly harm data center buildout. 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.
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