The Gulf was expected to drive the AI surge. Then the conflict began.

      Summary: Drone strikes targeted AWS data centers in the UAE amid the ongoing Middle East conflict, leading to a 55% surge in oil prices. Investments in Gulf AI initiatives are being reconsidered as regional risks evolve.

      In the early phase of the conflict that began in February, two Amazon Web Services data centers located in the UAE were struck. Nearly three months later, oil prices remain at approximately $100 a barrel, and the Strait of Hormuz is still closed. The Gulf's aspiration to establish itself as a global AI hub is currently experiencing its first significant challenge.

      Prior to the war, the UAE, Saudi Arabia, and Qatar were in competition to lead the AI sector, leveraging their access to inexpensive energy, strategic locations, and sovereign wealth. However, this situation has shifted.

      Investment in certain data center projects has either been delayed or is taking longer to finalize. Gary Wojtaszek, CEO of Pure Data Center Group, informed CNBC that the company has temporarily halted its investment decisions in the region. Mark Richards, a partner at BCLP, noted that decision-making now takes longer due to the heightened risks associated with investing in a region facing serious threats.

      Factors previously overlooked in investment strategies are now being integrated into the decision-making process. Trisha Ray from the Atlantic Council stated that the ongoing conflict is positioning AI infrastructure on the front lines in ways that would have seemed unimaginable a year ago.

      The energy landscape has also changed. Gulf markets had offered industrial power for about $0.11 per kWh, compared to $0.25 to $0.40 in parts of Europe. However, the war has disrupted global energy markets significantly, with the IEA declaring the effective closure of the Strait of Hormuz as the largest oil supply disruption in history.

      Brent crude oil prices rose over 55%, climbing from approximately $72 to nearly $120 during a three-month period. Gas prices for consumers in the UAE increased by 30% in April, indicating that even in energy-rich nations, large industrial users like data centers can no longer rely on inexpensive power.

      The drone strikes on AWS facilities represent a significant escalation, highlighting that data centers have become as strategically crucial as oil pipelines. Ray indicated that future facilities might need physical fortification, including potential underground construction or alternative locations outside the country.

      This threat is tangible, as Iran's Islamic Revolutionary Guard Corps has released satellite footage of OpenAI's Stargate campus in Abu Dhabi, labeling it a potential military target. The Gulf's AI infrastructure is now a factor in regional strategy in ways it was not originally intended to be.

      Major AI players in the Gulf maintain that the conflict will not dampen their ambitions. G42, backed by Mubadala, cited a strengthened commitment to its goals. Tareq Amin, CEO of Saudi Arabia’s HUMAIN, stated that the company is developing a comprehensive AI stack, leveraging the Kingdom's scale as a significant advantage. KKR’s Tara Davies remarked that this is a long-term endeavor.

      However, Aalok Mehta from the CSIS think tank expressed that the conflict has shattered perceptions of long-term stability in the Gulf. Future data centers are expected to face increased costs and longer construction timelines due to the necessity for facility hardening, anti-drone technology, higher insurance rates, and supply chain disruptions.

      The energy challenges for AI infrastructure are global rather than limited to the region. OpenAI has paused its Stargate UK project due to industrial electricity costs being more than four times higher than those in the U.S. Moreover, xAI is investing $2.8 billion in gas turbines because it cannot secure clean energy swiftly. The Gulf was anticipated to resolve these issues by providing affordable power, sovereign support, and expedited permitting, but the war has introduced new variables that were not part of previous investment models.

      Amazon directed CNBC to comments made by its CEO Matt Garman about the company’s continued enthusiasm for long-term investment in the region. Google and Microsoft declined to comment, while Cisco and Oracle did not respond at all. This absence of comments from hyperscalers contrasts with the assertive confidence expressed by Gulf sovereign investors.

      The ongoing global chip and memory shortage is already limiting the expansion of AI infrastructure. Factoring in geopolitical risks in an already strained supply market means that the Gulf's data center pipeline is facing challenges on multiple fronts: hardware shortages and increased difficulty in securing locations. While the region's AI aspirations are not extinguished, they have certainly become more costly, slower, and fraught with risks than they were four months ago.