Rising Oil Prices: AI Threatened by Soaring Energy Costs

The Surge in Oil Prices and Its Impact on AI

Data centers dedicated to artificial intelligence, known for their high energy consumption, are under pressure due to the recent surge in oil prices. This situation complicates the task for chip manufacturers and raises concerns about the rising costs of AI. The increase in energy prices could hinder the expansion of AI and affect the profit margins of tech companies. Additionally, the closure of a liquefied natural gas (LNG) plant in Qatar has also reduced the supply of helium, a crucial element for chip manufacturing.

The rise in oil prices, exacerbated by the conflict in Iran, has introduced notable volatility in the semiconductor markets. Shares of giants like TSMC, Samsung Electronics, and SK Hynix have experienced significant fluctuations, with declines ranging from 9% to 22% since the onset of hostilities. Investors are worried about the increased risks related to energy and supply.

Analysis of Energy Impact

Phelix Lee, an analyst at Morningstar, emphasized that rising energy costs could slow down the construction of AI infrastructure. Factories located in Taiwan and South Korea may face additional pressures due to the rising prices of LNG. In the United States, where most AI data centers are located, oil accounts for about 38% of total energy consumption. Although oil is not the primary source of electricity, its fluctuations influence the entire energy market.

AI data centers consume significantly more electricity than traditional server facilities, due to the intensive use of graphics processing units and advanced cooling systems. If energy prices remain high, cloud service providers may reconsider the pace of their AI server deployments, which would have a direct impact on chip manufacturers.

Strains on Material Resources

Beyond energy, other vulnerabilities are emerging. Helium, essential for semiconductor manufacturing, is threatened by the prolonged closure of LNG production in Qatar, which supplies nearly one-third of the world's helium. While bromine, primarily imported from Israel by South Korea, is not immediately threatened, an escalation of the conflict could disrupt this crucial supply for memory chips.

The sharp rise in oil prices due to the war in Iran has injected new volatility into semiconductor stocks and raised new questions about the cost and pace of the AI boom. Shares of TSMC, Samsung Electronics, and SK Hynix — major suppliers of AI chips — have experienced significant fluctuations since the conflict began, dropping between 9% and 22% as investors assess the growing risks related to energy and supply.

Phelix Lee, an analyst at Morningstar, wrote in a note on Tuesday that "higher energy costs for AI data centers could slow down AI infrastructure construction, while factories in Taiwan and South Korea would face increasing cost pressures due to rising LNG prices."

Energy markets have been at the heart of this turbulence. According to Lee, oil accounts for about 38% of total energy consumption in the United States, which houses most of the world's AI data centers. Although oil is not the primary source of electricity generation, higher crude prices tend to impact energy markets.

AI data centers consume much more electricity than traditional server facilities, due to energy-hungry graphics processing units and advanced cooling systems. If energy prices remain high, cloud providers may reconsider the pace of AI server deployments — a potential knock-on effect for chip manufacturers that benefit from AI-driven demand.

Oil prices have fluctuated significantly since the U.S. and Israel attacked Iran at the end of February, disrupting traffic in the Strait of Hormuz, the world's most critical energy passage. Brent crude futures were trading around $87 a barrel on Wednesday morning, while U.S. West Texas Intermediate was near $83, after both benchmarks had crossed $100 earlier this week before retreating.

Liquefied natural gas prices have also surged following the closure of Qatar's largest LNG export facility, tightening global supply. The U.S. Energy Information Administration stated on Tuesday that it expects Brent to average above $95 a barrel over the next two months due to supply disruptions caused by the war, before dropping to around $70 by the end of the year.

With oil prices over 40% higher this year, operating costs for chip factories and data centers are expected to rise. Morningstar estimates that energy expenses account for about 3% to 6% of projected revenues for 2025 for TSMC, Samsung, and SK Hynix. "If the war continues, we could see these costs increase significantly," wrote Lee, adding that a large portion of the burden could ultimately be passed on to customers due to the limited supply of AI-related chips.

Beyond Oil: Material and Shipping Risks

Energy is not the only vulnerability. Lee also reported risks to critical semiconductor inputs such as helium and bromine. Qatar supplies nearly one-third of the world's helium, a byproduct of LNG production that is essential for semiconductor manufacturing. A prolonged closure of LNG production could tighten helium markets, reduce chip yields, or, in the worst-case scenario, temporarily disrupt factory operations.

Bromine poses a lower immediate risk, as 98% of South Korea's bromine supply comes from Israel and flows remain relatively stable, Lee noted. "However, residual risks remain, as an escalation or severe prolongation of the war could destabilize the bromine supply, potentially affecting memory chip supplies as well," he added.