US President Donald Trump has just signalled the US might pull out from the US-Israel and Iran war very soon. US military action in Iran could end in “two to three weeks with or without a deal with Iran,” as reported by the BBC News today, quoting Trump. Passage through the Hormuz Strait which Iran has taken hostage has become a point of contention as 20 per cent of the world’s energy passes through it. The closure has caused a spike in energy prices across the board with country after country declaring an increase in petrol and electricity prices. Further prolonging the war might double or triple prices with catastrophic consequences for the global economy. Doomsday scenarios such as hunger (through fertiliser shortage), hyperinflation, job losses, business closures, violent protests, etc, were bandied about as likely consequences. Hence, the US’ potential pullout (without reopening of the Hormuz Strait) was considered the best path forward to restore normalisation of energy prices, as well as preventing further damage and casualties, amid the ballooning cost of war.
Some of the impacts of the war on Southeast Asia as stated by Sr (Dr) Samuel Tan, Founder & CEO, Olive Tree Property Consultants in his opinion published in w.media last week, include the following: the Strait of Hormuz blockade would force a massive rerouting of cargo, hence data center components headed to SEA would face delays and increased costs. Data centers would see the cost of operations increase due to surging oil prices. He reckoned that data centers would pass this on to their colocation and cloud customers. But there is a silver lightning to this as SEA is tipped to be the main beneficiary of a potential data center exodus from the Middle East, being seen as a safer destination.
So, if the war ends tomorrow, what then would be the impact on data centers in Southeast Asia?
A de-escalation would prompt immediate relief for data centers in Southeast Asia. The most immediate impact would be the stabilization of energy cost. Energy accounts for up to 60 per cent of data center operating costs. Oil prices have spiked to more than US$120 per barrel at one point. Upon cessation of war, the price of Brent crude could potentially fall back to the pre-war price of about US$70 per barrel resulting in a fall or stabilisation of electricity prices. Data centers that rely on gas-fired backup generation would benefit from normalisation of natural gas/LNG prices. Diesel prices would drop as well thus normalising procurement and storage costs. Diesel is widely used as fuel in onsite backup generators.
Critical components for data centers such as cooling systems, Uninterruptible Power Supply (UPS) units, and switchgear currently face 6-12 month delays due to the rerouting required to avoid the Hormuz Strait. Peace would restore shipping through Hormuz thus accelerating deliveries to Southeast Asian data center hubs. Operators would get back their freedom to source globally based on cost and quality rather than risk avoidance. Projects that have been delayed by the war for example, equipment bottlenecks, would be able to resume albeit with slight delay as some shipments through alternative routes take time to arrive.
Pricing pressure would also ease on colocation and cloud customers as the cost of running existing facilities normalise.
An overlooked critical component related to data centers are the subsea cables which Iran reportedly threatened to destroy. These would be spared that painful fate should peace return to the region. Cable systems like SEA-ME-WE 4 and 5 which route traffic between Southeast Asia and Europe via the Middle East would continue their peaceful existence while transmitting massive data across the continents.
The flight to safety as a result of the war through strategies like the “Middle East Plus One” may decelerate but not to a great extent as confidence in the safe haven of the Middle East has been shattered to a large extent. Consider the fact that AWS’ digital infrastructure in Bahrain and UAE has been impacted by drone strikes and the fact that Iran has explicitly targeted data centers, banks and technology infrastructure in Gulf states which host American military bases. Even if peace ensues, it remains to be seen how long that peace can last. As long as American military bases remain in the Middle East and as long as Israel has not achieved its stated aims for a war, the risk of further escalations hangs like a sword of Damocles. On top of that is Trump’s unpredictable moves which can swing either way on a given day.
Lessons learnt
- The transition to renewable energy would accelerate in order to be less dependent on oil and natural gas which saw massive price spikes during the war. Power Purchase Agreements (PPA) for renewables would gain traction as operators negotiate for longer term contracts. The effort to use alternative energy sources would gain renewed urgency as the risk of another Middle Eastern conflict cannot be dismissed.
- Subsea and terrestrial cable diversity: Although redundancy is no longer as urgent as during the war, it would be judicious to have more redundancies built, in addition to upgrades.
- Country and region selection become more important as infrastructure war risk is taken into account for future planning.
Final thoughts
The commitments that have flowed into Southeast Asia as a result of the war would continue to remain there and possibly more would be heading there because it would take months or even years to rebuild the infrastructure destroyed during the war. It’s even harder to rebuild confidence in the region. The Hormuz Strait will remain a potential flashpoint and would be considered a risky shipping lane for months and even years. Insurers which stopped coverage or substantially hiked premiums of ships crossing the Hormuz Strait may not lower much their war premiums or might not even resume coverage at all.
At the end of the day, for Southeast Asia, geopolitics in other parts of the world matter as it affects the supply chain to the region. If a weeks-long war in another region can potentially cause catastrophic consequences globally, what happens if the conflict is prolonged. This scenario is not impossible as a multi-national resolution to the complicated Mideast situation is not anticipated in the foreseeable future. Although Southeast Asia is considered a safe harbour, it would now have to take war into consideration as one of the operating risks. A potential flashpoint nearer home is the South China Sea which carries US$5 trillion of goods in transit. But that’s another story for another day.