The war ravaging the Middle East continues to involve new participants, from homes in Dubai to protesters in Iran getting caught in the crossfire of drones and missiles. At the same time, global trade is slowing dramatically due to the effective closure of the Strait of Hormuz, through which 11% of world trade passes. Another sector that is in the line of fire—literally—is data centers. Several of them in the region have been hit by enemy attacks during the two-week war, which has caused damage and interruptions in service.
Data centers are a fundamental part of modern economies, as they allow the provision of digital services essential for the functioning of countries. Therefore, it is not surprising that they have been targeted by both sides in the war, in an attempt to sow chaos and force capitulation. They are also highly exposed to broader disruptions in the region, because they are at the end of long and fragile supply chains.
Many of the chips, memory modules, network switches and cooling systems they depend on are based on materials that transit through strategic points in the Middle East or are produced in nearby states; from helium and other specialty gases used in semiconductor manufacturing, to finished metals and components moving between Asia, Europe and North America.
The near standstill of shipping through the Strait of Hormuz has skyrocketed shipping costs, reduced air cargo capacity and led insurers to increase war risk premiums, making it more expensive and time-consuming to move everything from server racks to backup generators and fuel.
At the same time, the strait is a vital artery for oil and liquefied natural gas (LNG), so any prolonged outage directly contributes to rising global energy pricesraising the cost of the enormous amounts of electricity and cooling consumed by hyperscale data centers and making it difficult to finance new projects.
That’s less of a problem for the United States, which has its own energy supplies, is the world’s largest exporter of LNG and is shielded from Gulf disruptions by its abundant domestic production.
Beyond the immediate impact, there is a collateral risk from the conflict for data centers outside the Middle East. Abe Silverman, a research associate at the Ralph O’Connor Sustainable Energy Institute at Johns Hopkins University, says the Middle East conflict is not primarily a direct data center supply chain problem.
“The biggest threat to data centers is not oil trafficking or the disruption of global supply chains,” he says, adding: “The biggest threat, today, is the perception that they are raising the costs of electricity for ordinary consumers.”
Currently, maritime traffic through the Strait of Hormuz is virtually paralyzed, including LNG shipments from the region. If this disruption persists and drives up natural gas and electricity prices, consumers could blame data centers for worsening their already high electricity bills, according to Silverman.
While those physical and economic pressures will take months to fully take effect on energy supply chains and markets, the most immediate consequence may be political: as energy prices rise, regulators and Communities could increasingly take a closer look at whether new data centers are worth the added pressure on already expensive electricity bills.
“We don’t foresee a material change in company plans or further expansion of data centers in the United States, but it is something that should be taken into account by those focused on Europe and the Middle East,” said Julien Dumoulin-Smith, managing director and senior equity analyst at Jefferies, a global investment bank.
There is also the question of financing these megaprojects, especially those closer to the epicenter of the conflict, and whether it is possible to ensure their construction safely. According to S&P Global Market Intelligence, deals worth about $2.5 billion were closed last year to build data centers in the Middle East. If the security of that infrastructure and the profitability of the investment cannot be guaranteed as tensions in the region increase, investing there becomes a much more difficult option.
This could cause some projects to be forgotten or, worse still, investment in them to be diverted to states hostile to the West. “The consequence will be that they will be rebuilt quite quickly, and if the Americans — and the Europeans — don’t act quickly, they will be rebuilt with Chinese investment,” says Lynette Nusbacher, a former intelligence officer in the Canadian and British armies.
But, according to Nusbacher, each new attack sends a message. “Data centers are an important part of the future of the Gulf monarchies after the oil era,” he says, adding: “Attacking a data center is not a symbolic act, but a way to demonstrate that the United States cannot guarantee them any type of security for their future.”
