The boom we are currently seeing in AI is what economists describe as a speculative boom. A speculative boom happens when an asset’s price rises far above its real value, driven by investor optimism and high demand rather than fundamental value. It happened during the dot-com bubble of the late 1990s, when internet company stocks soared before many of them suddenly lost value.
In the case of AI, we are experiencing something similar to the dot-com bubble. A technological breakthrough promises to transform the economy dramatically. Capital floods in and valuations detach from any plausible measure of future profitability.
For a while, everyone genuinely believes the hype. Then something breaks. Maybe one of the firms involved in the boom collapses. Maybe something shifts in the wider economy. Right now, the Iran War could be the cause that breaks the AI industry.
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Iran War Exposes the Fragilities in The AI Supply Chain
Meta has pledged to invest more than $600 billion in AI data centers by 2028. Apple has committed $500 billion, Amazon is spending $200 billion on data centers, Google sits at $175 to 185 billion, and Microsoft is close to spending $105 billion in a single year on AI. That is roughly $1.5 trillion in committed AI capital, most of it tied to data centers, chips, and the supply chains that feed them.
Investors have committed trillions of dollars to the sustainability of the fragile supply chain that crosses more than 70 borders before reaching the final consumer. Silicon wafers are manufactured in Japan or Germany. Chip design happens in the US or the UK. The actual production of the advanced chips is done entirely in Taiwan (92%) and South Korea (8%). Assembly and testing happen in Southeast Asia. The finished chip ships to a US data center.
Both South Korea and Taiwan depend on fossil fuels for energy, which almost entirely come from imports, particularly via the Strait of Hormuz. Both the chip giants rely on the Middle East for more than one-third of their liquefied natural gas needs. Asia’s chip industry is reliant on the Middle East for chemicals, too. About one-third of the global helium supply, critical for cooling silicon wafers, comes from Qatar. Roughly half of the global sulphur, used for chip cleaning and etching, transits the Strait. The Dead Sea is also the world’s largest source of bromine, a chemical that helps score patterns on silicon wafers. South Korea imports virtually all of its supply from Israel.
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The Cheap Debt Fueling the AI Boom
The Iran War is also weighing on the private credit industry, which has financed much of the AI boom. Private credit firms were feeling the strain of the “SaaS-pocalypse,” even before the war, as investors worried that AI would threaten the financial sustainability of software businesses. Some private credit firms, like BlackRock, even imposed restrictions to stop investors from leaving.
The massive increase in oil prices is not just limited to the gas stations. It is leading to a general rise in inflation. According to Oxford Economics, every $10 sustained increase in oil prices reduces global GDP by 0.1%, while the Federal Reserve believes that the same $10 increase raises US inflation by roughly 0.35%. Oil is up about $30 from pre-war levels right now. The US started this war with inflation already above its 2% target, and American consumers were already financially stretched.
Central banks will likely respond by increasing the interest rates. This shift will push up the cost of new loans, as well as servicing existing debts. The house of cards that was built on “manageable” balance sheets will begin to look precarious. For example, Oracle has taken on significant debt to position itself as a key provider of cloud and data center capacity. In an environment of rising rates and falling valuations, those debts start to look less like strategic investments and more like vulnerabilities.
The investors making trillion-dollar bets on AI were not irrational. But it was a bet made under specific conditions: stable energy prices, accessible components, functional shipping lanes, cooperative geopolitics, and a consumer with enough financial bandwidth to absorb a few years of transition costs before the gains showed up on their side of the ledger. None of those conditions exists right now.
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