Oil's price spike is bad news for power-hungry AI

The escalating oil prices, ignited by the ongoing conflict in Iran, have introduced significant volatility to the semiconductor market, prompting concerns regarding the future of the AI industry. Major AI chip manufacturers like TSMC, Samsung Electronics, and SK Hynix have seen their stock prices fluctuate dramatically, with declines ranging from 9% to 22%, as investors grapple with the implications of rising energy costs and supply chain disruptions. Phelix Lee, an equity analyst at Morningstar, highlighted in a recent report that increased energy expenses for AI data centers could hinder the growth of AI infrastructure. He pointed out that manufacturing facilities in Taiwan and South Korea could face mounting cost pressures due to higher liquefied natural gas (LNG) prices. The energy market turbulence is noteworthy, as oil contributes to approximately 38% of total energy consumption in the United States, where a majority of the world's AI data centers are located. Although oil isn’t the primary source for electricity generation, surging crude prices tend to have a cascading effect across various energy markets. AI data centers require substantially more electricity than conventional server setups due to their reliance on high-performance graphics processing units and sophisticated cooling systems. If energy prices remain elevated, cloud service providers might need to reassess the speed at which they deploy AI servers, which could have repercussions for chip manufacturers benefiting from the AI demand boom. Following military actions involving the U.S. and Israel against Iran, oil prices have fluctuated sharply. Brent crude futures were priced around $87 per barrel early Wednesday, with U.S. West Texas Intermediate at about $83 after both indices had previously surpassed $100 before retreating. Additionally, the closure of Qatar's largest LNG export facility has caused liquefied natural gas prices to spike, tightening the global supply. The U.S. Energy Information Administration has projected that Brent prices could average above $95 per barrel over the next two months due to the conflict's impact on supplies, before potentially easing to around $70 by the end of the year. With oil prices soaring over 40% this year, the operating costs for semiconductor fabs and data centers are expected to increase significantly. Morningstar estimates that energy expenses might account for approximately 3% to 6% of projected revenues for TSMC, Samsung, and SK Hynix by 2025. Lee noted that should the war persist, these costs could rise substantially, and the burden may ultimately be shifted onto consumers due to the limited supply of AI-related chips. Beyond energy costs, Lee also emphasized vulnerabilities concerning essential semiconductor materials like helium and bromine. Qatar, a major supplier of helium—crucial for semiconductor production—could see tight markets if LNG production remains halted for an extended period. This could adversely impact chip yields or even lead to temporary shutdowns at fabrication facilities. While bromine poses a lesser immediate threat, as the majority of South Korea's supply comes from Israel, any significant escalation of the conflict could disrupt this supply chain as well, affecting memory chip availability.