AI-ran 🧑🏻💻🇮🇷
energy chokepoint = compute chokepoint = economic chokepoint
"Games are won by players who focus on the field — not by those whose eyes are glued to the scoreboard."
—Warren Buffet
It’s not just Tankers that can’t pass through the Strait of Hormuz.
Energy Chokepoints
The war is expanding and Iran has showed resolve in attacking and destroying tankers that try to pass through the Strait of Hormuz.
A closed Strait of Hormuz means Tankers that carry energy commodities from the Persian Gulf cannot reach their destination. This disrupts global energy markets and by extension the global economy.
Qatar is wholly dependent on Hormuz, unable to export any of its Gas — which by the way is 20% of Global LNG exports.
The KSA (Kingdom of Saudi Arabia) exports their Crude via Hormuz — but they can bypass ~50% of their capacity via a pipeline that sends their Crude West, sending towards the Red Sea port of Yanbu. Note that the Red Sea Port can only load 4.5mln barrels / day, even if the pipeline can transport ~7mln barrels.
Bottlenecks everywhere. Note that this considers the Red Sea remains open for vessels.
The UAE can transport 1.5mln barrels/day via Fujairah — the Fujairah that was just rendered inoperable right now. Probably.
Kuwait has no bypass and is wholly dependent on Hormuz.
Iraq is also heavily dependent on Hormuz with a small outlet via the Northern Pipeline to Turkey. That flow point is heavily tormented, with politics and interests materially getting in the way.
Today I woke up to news that Donald warned NATO of a very bad future if the allies fail to help the US in Iran.
“It’s only appropriate that people who are the beneficiaries of the Strait will help to make sure that nothing bad happens there… If there’s no response or if it’s a negative response I think it will be very bad for the future of NATO.”
So the US now calls for the “the allies” to step in and keep the Strait of Hormuz open. Which implies the US cannot keep it open themselves.
This also tells us Donald could be preparing for a US Export Ban, keeping all US Crude and Product for domestic consumption. Leaving everyone else to fend for themselves.
“You don’t want to jump into the fight? Take that! This is your problem, not mine!” —Donald Trump
Philo’s Take on Hormuz
Neither the US nor its allies can keep Hormuz open. The disadvantages of fighting so far away from home are too heavy to be overcome — fighter jets and aircraft carriers notwithstanding.
The allies will not send any military to the area to try and keep Hormuz open. Instead, they will be forced to open diplomatic relations directly with Iran, in an attempt to save what can be saved.
Chinese and Pakistani vessels are already allowed to pass unbothered. A closed Strait does not mean closed for everyone. Strait of Hormuz discrimination is very real!
That begs the question, does passing the Strait of Hormuz safely, guarantee loading the commodity? Probably not.
It seems Saudi as well as the UAE are used as platforms for the US to strike Iran — with Iran using that as pretext to strike back.
This puts the global economy on a major bind because
First we need the product to power the engines of the vessels that move the global economy (everything will soon be in undersupply)
Second, we need to pass the Strait of Hormuz safely!
Third, after passing the Strait, we need the energy infrastructure to still be operable to keep producing and then loading the commodity! 🤦🏻♂️
And if Iran’s Kharg Island is destroyed, the energy complex of the whole area will also be destroyed as a response.
Energy Fragility
Fragility everywhere. The risks to the global economy of the closing of the Strait of Hormuz are both unfathomable — but also very real.
In the first-order, the US is largely protected as it is not dependent on the Persian Gulf. But China, India, South Korea, Japan and Europe are dependent.
And in a globally-interconnected economy, everyone is dependent on everyone else!
Maximum P-AI-n
As the war expands, Iran has signalled an expanded list of legitimate targets.
“With the expansion of the regional war into an infrastructure war, the scope of Iran’s legitimate targets gradually becomes broader.”
“Included on the list are offices claimed to be associated with Google, Amazon, Microsoft, Nvidia, IBM, Oracle and Palantir in Israel and around the region, including in Dubai and Abu Dhabi.”
—> Which insurance companies are going to foot that bill?
THE TRUMP CARD DOES NOT EXIST 🂡🪃💥
From this point onwards, whatever the Administration tries to do will boomerang in their faces. And in our faces too.
Cutting off the rest of the world from US energy (export ban) means pushing for a global recession that will very soon include the US
Pushing for a Western coalition to keep the Strait open would mean more casualties and more negativity around the conflict
Prolonging this conflict would also guarantee a global recession — with energy costs skyrocketing and short-circuiting the global economy
Expect energy rationing to be adopted by governments very soon if there is no major reversal of the way things are going
Trump’s ONLY Move
This is why I believe that eventually Trump will be forced to retreat all US military assets from the area and de-escalate with Iran. Rhetoric aside.
But that’s a very big EVENTUALLY — and everything rests on the timing of that move. And the US retreating does not guarantee the remaining belligerents will immediately stop fighting.
The AI Cycle
The AI Cycle has been one of the key forces keeping the US economy strong — with solid GDP growth and employment figures, regardless of the Fed’s rate hike cycle.
Power (⚡️) costs are only a fraction of compute costs — with Data Center capex and non-power opex being the greatest input costs in generating compute. Even a doubling of electricity costs does not change compute economics by much.
But skyrocketing energy costs and crashing consumer confidence means everyone will start to cut their spending. And I think paying for 3 Chatbot subscriptions won’t be their priority.
At a time where AI Labs are increasing their investment in the space, and AI Wars (i.e. AI Race) are expanding — the last thing Big AI needs is a global recession hitting:
their stock valuations
their Ad revenue
and their Product revenue (whether AI or non-AI)
Imagine mass layoffs driven by both a weakening economy and the spread of AI.
Read LaaS for context on how proliferation of AI technology and the great costs of implementing it affects the economy.
This scenario would put the AI Complex Wars into overdrive. The race to the bottom becomes squeezed time-wise and catalyses outcomes much faster.
We discussed the competitive dynamics in AI touching on Google’s grand strategy in dealing with Open AI’s ascent here 👇
Eyes on the (Battle)field
Instead of looking at the battlefield and energy flows — investors are looking at the scoreboard (i.e. the market) as the guiding light for what is happening.
Shockingly, the White House is also looking to the market for clues on how good or bad things are going. Talk about market fundamentalism….
But TACO is only real if chickening out results in near-zero damage. In this case, every minute that passes means years of re-building — with a massive bill to pay.
And not only in financial capital, but also in political capital 👈
The geopolitical equilibrium has been irreparably shattered.
The full consequences of this will take time to be understood and felt — with markets adopting and abandoning narratives in an attempt to price in the most fitting scenario.
All scenaria remain open and the range of outcomes is extremely wide. You can’t just put Humpty Dumpty back together again.
Philo 🦉
No man is an island entire of itself; every man is a piece of the continent, a part of the main; if a clod be washed away by the sea, Europe is the less, as well as if a promontory were, as well as any manner of thy friends or of thine own were; any man’s death diminishes me, because I am involved in mankind. And therefore never send to know for whom the bell tolls; it tolls for thee.
-John Donne