What the Iran War Means for the Funding of AI
For much more on AI finance, please join me and my colleague Cory Weinberg at the New York Stock Exchange on Monday, April 27, for The Information’s Financing the AI Revolution forum. Hear from top executives and investors on how the rapid buildout of AI is reshaping tech, finance, and capital markets. Learn more here.
It’s hard to overstate how lucky AI developers were that their brilliant technical breakthroughs occurred when the financial system was perfectly positioned to fund their ambitious build-out.
Interest rates were relatively low and declining, energy was cheap and the world, including the tech giants, was awash in cash. Some of those factors were shifting before the Iran war, and last week they changed dramatically.
In the second week of the war, the economic headlines have been all about oil and gasoline prices. Neither commodity has a direct link to the AI build-out—oil is rarely used to produce electricity, and gasoline costs are rounding errors for data center developers.
The second-order effects, though, are significant. Higher oil prices can mean higher inflation, which typically means higher interest rates. Neither one is good for the debt-heavy AI build-out, which would face higher costs and higher interest payments.
Higher inflation also dashes hopes that the Federal Reserve Bank will further cut interest rates this year. Investors had expected cuts later this year in the expectation that inflation would ease and the jobs market would weaken further. Now the risk is that inflation will pick up. The labor market has already gotten worse—the U.S. shed nearly 100,000 jobs in February.
A prolonged war would slow the economy. The big fear on Wall Street right now is stagflation, where the economy weakens but inflation stays high, limiting the Fed’s ability to cut rates.
None of that is good for a huge infrastructure build-out. If the war drags on, the already large U.S. government deficit will increase further, potentially driving interest rates higher.
The actual building of AI infrastructure was already facing political and financial challenges before the war started. These will likely get worse. Data centers may not use much oil or gasoline, but consumers do. They also use natural gas, which produces much of the electricity that powers data centers. Consumers already blame higher electricity costs on data centers, so it’s not a leap to see rising fuel prices create more opposition to the AI build-out. Local pushback has made it harder to build data centers in much of the country.
The timing for the jump in fuel prices is terrible. The cold winter in much of the northern U.S. has led to spikes in heating bills, further straining household budgets. Home heating costs were already expected to rise 11% this winter, according to the National Energy Assistance Directors Association, and the cold weather pushed them higher still.
One of the great ironies last week was that days after President Donald Trump started the war with Iran, he dragged the heads of seven big AI developers to Washington to pledge to keep electricity rates low for consumers. The event was little more than a publicity stunt. Some of these companies, notably Google, Amazon and Microsoft, had already taken significant steps to do that.
In a further irony, the companies are defying Trump’s campaign against using renewable energy to power AI. They are using solar, wind and batteries because these are the cheapest and most readily available types of power. (Don’t let the decline in oil prices this week fool you; industry veterans see serious problems ahead if Persian Gulf oil remains trapped.)
The financing spigots for AI are still open. Stocks of big AI developers have held up, and initial public offerings for SpaceX, OpenAI and Anthropic still appear to be on track. The main crack in the market has been private credit, where small investors are fleeing big lenders such as Blue Owl and Blackstone. That has little to do with the war: Investors are concerned with both the cost of the AI build-out and the lenders’ exposure to software companies, which they see as vulnerable to disruption by AI. Higher interest rates, though, would strain these funds.
The tech giants appear to be more vulnerable to the war itself because of their presence in the Middle East than because of any market turmoil. Drone strikes damaged three Amazon data centers in the region last week and the war could jeopardize some big data center projects planned for the region. Despite that, Amazon had no problem selling roughly $50 billion in bonds in the U.S. and Europe this week, and had orders for more, according to Bloomberg.
The AI build-out was enabled by a benign financing environment and the tech giants’ deep pockets. So far, those pillars remain intact. But wars have a way of upending the status quo.
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