Oil Supply Risks and AI Power Demand Raise Energy Costs

Energy Costs Are Rising From Two Different Pressures

Energy markets are facing pressure from two distinct sources. The Iran conflict and disruptions around the Strait of Hormuz have pushed crude prices sharply higher, while the rapid expansion of AI data centers is placing growing strain on U.S. electricity infrastructure.

Crude oil has climbed roughly 35% in a matter of weeks, with Brent reaching $100 a barrel before trading near $97 and WTI rising above $90. At the same time, capacity prices in the PJM Interconnection have reached their regulatory ceiling as electricity demand rises, with data centers identified as a major contributor. Together, the developments are increasing transportation, shipping, electricity, and infrastructure costs across the economy.

Key Points

• Oil prices have risen sharply as the Iran conflict restricts the Strait of Hormuz and creates additional risks across the Red Sea, Suez Canal, and Black Sea shipping corridors.
• War-risk insurance for tankers transiting Hormuz has jumped from about 0.25% to roughly 5% of vessel value, while rerouting oil can add freight costs and as much as 20 to 30 days to some voyages.
• AI data centers are increasing electricity demand as U.S. grid capacity struggles to expand quickly enough, creating another source of rising energy costs for households and businesses.

Why Are Oil and Energy Costs Rising?

The immediate pressure on global energy markets begins with the Strait of Hormuz. Before the war, roughly 15 million barrels of Gulf oil moved through the waterway each day, representing around one-fifth of globally traded oil.

With the channel still largely closed, producers have been forced to rely more heavily on alternative routes. Saudi Arabia has increased flows through its East-West Pipeline to Red Sea terminals, while the United Arab Emirates has directed additional oil toward Fujairah on the Gulf of Oman.

Those alternatives have limited capacity. Saudi Arabia's East-West Pipeline and the UAE route together had approximately 3.5 million to 5.5 million barrels per day of spare capacity before the war, and both are now operating close to full, carrying around 6.5 million barrels per day.

The Red Sea alternative has also become more dangerous. Houthi attacks on Saudi-linked shipping caused tankers to change direction, while Kazakhstan's exports were disrupted after the Caspian Pipeline Consortium suspended loadings at its Black Sea terminal following attacks.

Saudi Arabia has increasingly redirected crude north through Egypt rather than south through Bab al-Mandeb. Oil transit through the Suez Canal reached its highest level in two and a half years during the first three weeks of July, while inflows into Egypt's Sumed pipeline increased 50% from June.

But rerouting creates logistical costs. Fully loaded very large crude carriers cannot pass directly through the Suez Canal because of their depth. Operators can unload some crude into the Sumed pipeline, transfer cargo to smaller vessels, or sail around Africa. The longest alternative can add 20 to 30 days to an Asia-bound journey.

That means the economic impact is not limited to the price of the oil itself. Longer voyages, constrained pipeline capacity, and higher insurance costs all raise the cost of moving energy around the world.

Tanker Insurance Shows How Serious the Shipping Risk Has Become

One of the clearest measures of physical risk is coming from marine insurance.

Before the latest escalation, war-risk insurance for a large crude carrier passing through the Strait of Hormuz typically cost around 0.25% of the vessel's value. Those premiums have risen to approximately 5%, an increase of almost 1,900%.

For a tanker worth $100 million, the cost has moved from approximately $250,000 to several million dollars for a single voyage.

Unlike crude futures, which can move rapidly in response to political headlines or changes in market sentiment, insurance premiums reflect underwriters' assessment of potential losses on actual vessels.

The increase therefore adds another layer to the oil market's current price signal. Brent briefly exceeding $100 reflects tighter energy conditions, while the surge in tanker insurance demonstrates the increased cost of physically transporting supply through one of the world's most important energy corridors.

The risk also extends beyond Hormuz. Nearly 9 million barrels per day have recently moved through Bab al-Mandab, including about 4 million barrels per day that would be difficult to reroute if Hormuz, Bab al-Mandab, and the Suez Canal were disrupted simultaneously.

These pressures help explain why oil prices can remain sensitive even when global demand is not uniformly strong.

China provides an important example. Chinese crude imports fell more than 40% year over year in June to 7.2 million barrels per day, more than 4 million barrels below pre-war levels.

The decline, however, primarily reflected China drawing down inventories accumulated during 2025 rather than an equivalent collapse in underlying consumption. China had accumulated an estimated 700,000 to 1.1 million barrels per day of surplus crude during 2025 and held an estimated 1.4 billion barrels of commercial and strategic reserves at year-end.

Those inventories have allowed China to reduce purchases during the supply shock, helping contain global prices. But OECD commercial inventories have continued falling since the conflict began, reducing that cushion elsewhere.

The range of potential outcomes remains unusually wide. Goldman Sachs maintained a baseline forecast of $80 Brent for the fourth quarter of 2026 and $76 WTI, based on an assumption that geopolitical tensions gradually ease. If Hormuz remains significantly disrupted through 2027, however, its scenario analysis puts Brent above $120 in the fourth quarter of 2026. Simultaneous disruptions involving Bab al-Mandab and Suez could add another $25.

How Could Higher Energy Costs Affect the Economy?

The economic transmission begins with transportation. The national average gasoline price has risen to $4.11 per gallon as crude prices climbed, directly increasing costs for households.

The effect extends through manufacturing and shipping because petroleum is used throughout transportation and industrial supply chains. Higher crude prices and more expensive freight therefore create additional inflation pressure beyond gasoline stations.

Recent market behavior reflected that concern. During a comparable escalation, the S&P 500 fell 0.79% and the Nasdaq declined 1.55%, while the U.S. 10-year Treasury yield moved higher rather than lower.

That combination is significant because geopolitical stress does not necessarily produce the traditional pattern of investors moving from equities into bonds when the shock itself increases inflation concerns. Higher energy costs can pressure economic activity while simultaneously complicating the inflation backdrop.

Gold has also behaved differently from its traditional safe-haven reputation. The metal has fallen more than 20% since the conflict began in February, as expectations that the Federal Reserve could maintain a hawkish stance in response to energy-driven inflation outweighed demand for gold as protection against geopolitical uncertainty.

Oil, bonds, equities, and gold are therefore responding to different aspects of the same energy shock. Crude reflects supply and transportation constraints. Bond yields reflect inflation concerns. Equities face the economic consequences of higher costs. Gold has been pressured by expectations surrounding monetary policy despite geopolitical uncertainty.

The energy issue is also increasingly extending beyond petroleum.

U.S. data centers currently consume approximately 5.9% of electricity generation and are on pace to consume nearly 20% by 2035. Unlike transportation demand, AI computing requires continuous electricity for servers, model training, cloud workloads, and other data-center operations.

Evidence of that pressure is already visible in PJM Interconnection, the grid operator serving roughly 67 million people across 13 states and Washington, D.C. Its July 14 capacity auction for 2028-29 cleared at the $325 per megawatt-day price ceiling for the third consecutive auction.

Supply was still approximately 6.8 gigawatts short of what PJM estimates is necessary for reliability.

Of the auction's $16.4 billion in total capacity charges, approximately $6.3 billion was directly attributable to data-center demand. Across the past four auctions, the total reached $29.4 billion.

Without the regulatory price cap, PJM's simulation showed capacity prices reaching $554.72 per megawatt-day across the region and $776.69 in the Chicago-area zone served by ComEd.

The result is a second channel through which energy costs can affect households. Oil increases transportation and shipping costs, while growing electricity demand requires investment in generation and transmission infrastructure.

Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOG), Oracle (ORCL), and Meta Platforms (META) are responding by pursuing investments or partnerships involving nuclear power, small modular reactors, geothermal energy, hydrogen fuel cells, battery storage, and other sources of electricity.

The issue is timing. Additional generation takes years to develop while AI-related electricity demand is expanding now.

What It Means for Investors

The current energy environment is being shaped by both immediate geopolitical disruption and longer-term structural demand.

In oil, the central issue is not simply the quoted price of Brent or WTI. Tanker insurance, shipping availability, inventories, pipeline capacity, and alternative transportation routes determine whether crude can physically reach buyers at an acceptable cost.

China's inventory drawdown has helped absorb part of the current shock by allowing the world's largest crude buyer to reduce imports sharply. Meanwhile, Gulf producers are accelerating efforts to reduce their dependence on Hormuz.

Saudi Arabia is relying more heavily on its East-West Pipeline, the UAE is expanding its route to Fujairah, and Iraq is considering alternative export corridors. Abu Dhabi's state oil company is also working on a $3 billion, 300-kilometer pipeline project designed to increase deliveries to Fujairah by more than 1.2 million barrels per day.

Kuwait is simultaneously attracting long-term capital into its energy infrastructure. Kuwait Oil Company agreed to a $16 billion lease-and-lease-back transaction covering 13 pipelines spanning approximately 320 kilometers. Blackstone, Brookfield (BAM), and KKR (KKR) will collectively hold 49% of the joint venture, while Kuwait Oil Company retains 51%, full ownership, and operational control. The transaction is expected to generate $7.85 billion in upfront proceeds supporting broader capital expenditure plans.

These projects illustrate how geopolitical constraints are influencing infrastructure decisions across major oil-producing countries.

Electricity presents a separate challenge. AI infrastructure is creating demand for generation capacity at the same time that existing grids face supply constraints. The resulting costs are already appearing in capacity auctions and utility bills, while technology companies increasingly seek dedicated energy sources for their data centers.

Taken together, the oil and electricity markets show that the cost of energy increasingly depends not only on how much energy is available, but also on whether infrastructure can deliver it where demand is growing.

Conclusion

Oil's rise toward $100 a barrel reflects more than geopolitical headlines. The closure of the Strait of Hormuz has redirected global crude flows toward alternative pipelines and shipping corridors that have their own capacity limits and security risks. War-risk insurance premiums rising nearly 1,900% illustrate the physical risks embedded in moving oil through the region.

China's sharp reduction in crude imports has helped contain the immediate price impact, but its ability to draw inventories does not eliminate tightening elsewhere. Falling OECD inventories and increasingly complicated shipping routes leave global energy markets sensitive to further disruption.

At the same time, AI is creating a separate energy challenge inside the United States. Data-center electricity consumption is expanding rapidly, PJM capacity prices have repeatedly reached their ceiling, and infrastructure costs are increasingly affecting electricity bills.

The market signal extends across crude oil, gasoline, electricity, bonds, equities, and gold. Energy has become both a geopolitical supply issue and an infrastructure capacity issue, with the economic effects increasingly visible beyond the commodity markets themselves.

FAQs

Why have oil prices risen toward $100 per barrel?

Oil prices have risen because the Iran conflict has disrupted the Strait of Hormuz and increased risks across alternative shipping routes. Limited pipeline capacity, Red Sea attacks, higher insurance costs, and falling inventories have added pressure to global energy markets.

Why are tanker insurance costs important?

Tanker insurance measures the cost of accepting physical shipping risk. War-risk premiums for large crude carriers passing through Hormuz increased from about 0.25% to approximately 5% of vessel value, raising transportation costs substantially.

Why did China's oil imports fall so sharply?

China has been drawing down crude inventories accumulated during 2025. Imports fell more than 40% year over year in June to 7.2 million barrels per day, while underlying oil consumption declined by a much smaller 5%.

How are AI data centers affecting electricity costs?

AI data centers are increasing demand for continuous electricity while generation capacity struggles to keep pace. In PJM's latest capacity auction, about $6.3 billion of $16.4 billion in total capacity charges was directly attributable to data-center demand.

Why has gold fallen despite geopolitical uncertainty?

Gold has been pressured by expectations that energy-driven inflation could keep monetary policy hawkish. The metal has fallen more than 20% since the conflict began in February despite its traditional role as a safe haven during geopolitical stress.

This article was created with AI assistance and reviewed by an editor. For details, please refer to our Terms of Use.

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