An AI sized elephant in the room

Many expect artificial intelligence (AI) to profoundly change the world, transform the speed of knowledge creation, and in doing so, deliver a significant productivity boost.

However, the growth of AI will increase the challenge of the world meeting net zero climate goals.

The draft Paris Climate Accord was released in December 2015, seeking a 43% reduction in emissions by 2030. OpenAI, the American based AI research organisation, was also launched in December 2015. Those countries involved in signing the headline-making draft accord will not have comprehended, at the time, the progress and impact that AI would have on global energy consumption and carbon emissions. This will inevitably contribute to most of the countries missing their Paris Agreement 2030 goals.

This is because of the demand for electricity to power the data centres which are now transitioning to AI hyper-scale. The International Energy Agency revealed that, in 2022 electricity demand from data centres could more than double from 460 terawatt-hours (TWh) to over 1,000 TWh by 2026 alone. In the US, more than a third of additional electricity demand will come from growth in data centres by 2026. Alphabet (Google) admitted recently that it had been unable to keep pace in building enough renewable capacity to offset the emissions of these new facilities and indicated that its net zero 2030 target could be delayed as a result of data centres.

Earlier this year even Elon Musk warned, “The combined pressure from AI and electric cars on electricity and transformer production is creating an unprecedented strain on our power infrastructure.”

It is not just energy usage. Water is also needed to cool the facilities. Virginia is home to the world’s largest concentration of data centres, including facilities used by Amazon, Google, and Microsoft.  Water consumption in Virginia has jumped by two-thirds since 2019.

Regulators are also becoming increasingly wary of the energy footprint of data centres. Last year, the EU updated its Energy Efficiency Directive, particularly focusing upon data centres. Larger sites will now have to report energy consumption, emissions, waste heat utilisation, renewable electricity use and water usage. The EU will use this data to formulate a plan to reduce the sector’s emissions.

Some argue that AI will be able to solve its own sustainability as it develops. However, this is countered by the fact that the computing power needed to train AI has also grown substantially.

Unfortunately, it looks as if AI comes with a potential threat to the Earth’s climate. Talking of overheating, investor concerns have been increasing about the levels of up-front AI capital expenditure and whether exceptional growth rates are sustainable.

What have we been watching?

Markets focused on the meeting of central bankers at Jackson Hole for pointers from the Federal Reserve on US interest rates. Global PMI business activity indicators were also published, which continue to show a very distinct contrast between manufacturing and services.

Speaking at Jackson Hole, US Federal Reserve (Fed) Chair Jerome Powell delivered the biggest indication yet that the Fed will lower interest rates at its next meeting on 18^th September. In a particularly explicit steer, Powell insisted that ‘the time has come for policy change’ but declined to comment on speculation that the committee could ease by 0.5% rather than 0.25%. By comparison, the tone of the comments from Bank of England (BoE) governor Andrew Bailey suggests that a UK September interest rate cut is unlikely. As a result, Sterling edged up to almost $1.32.

The situation in the Middle East deteriorated further after Israel and Lebanon’s Hezbollah mounted their biggest round of cross-border strikes since the war in Gaza began.

Canada became the latest western government to impose 100% tariffs on Chinese electric vehicles. Meanwhile, the US National Security Advisor is visiting Beijing. This comes as China is embroiled in disputes with US allies, the Philippines and Japan over incidents in the South China Sea. The latest has seen Japan accuse a Chinese spy plane of breaching its airspace, in what would be the first known instance of such a direct violation.     

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The UK ‘flash’ August PMI manufacturing reading was steady at 52.5 but the service sector picked up to 53.3. Encouragingly, for the Bank of England, price pressures in the services PMI fell in the latest reading. UK economic growth prospects are looking brighter, but will the October Budget dampen this? Recent government borrowing numbers haven’t been good, so the ‘black hole’ is looking bigger and inflation-busting public sector pay awards won’t help.

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In Europe, ‘flash’ August PMI manufacturing activity in France and Germany was lower, with the EU reading dropping to 45.6. However, service activity picked up to 53.3.   

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The US ‘flash’ August PMI manufacturing reading dropped to 48.0, but service sector activity picked up to 55.2.     

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In Japan, the ‘flash’ August manufacturing PMI improved to 48.7, while service sector activity edged up to 54.0.

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Gold hit a new all-time high as China boosted gold import quotas for Chinese banks. Chinese 10-year bond yields fell to a record low last week with concerns about the economy and deflation. Regional banks are being encouraged to invest cash in the economy rather than park it in bonds. Meanwhile, Chinese investors are seeking safe-havens, with gold an obvious candidate.

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Brent oil rallied from recent lows to $81 on the escalation in the Middle East and a missile attack by Iran-backed Houthi rebels on an oil tanker in the Gulf of Aden.

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Finally, another example of how a business can be hit by the law of unintended consequences. Mamod, the maker of model steam engines and trains, founded in 1937, has ceased trading due to a ban on hexamine fuel tablets. Counter-terrorism officials said the chemical had been used to make bombs! Mamod had been making sales of £50,000 per month but sales dropped by 50% following the ban. Ironically, the scarcity of new stock has led to a boom in the value of historic Mamod models with classic examples said to be fetching up to ten times their original value at auction.

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Read Last Week’s Alpha Bites – Supermassive Black Hole

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.