The price of oil (WTI crude) has, pardon the phrase, tanked since midyear, falling nearly 50% from over $100 a barrel to just under $55. Naturally, since energy is the main consumable of data centers, the question arises regarding the potential impact of the falling oil price on the industry. Here’s a look at what might be in store.
The fall in the price of oil bears an eerie resemblance to the decline it suffered in 2008 as the recession set in. The factors driving this sharp falloff have been laid at the feet of everything from geopolitics (such as the increasingly strained relationship between Russia and the West) to greater energy efficiency to a supply glut owing to the so-called shale-oil boom in the U.S. Another possibility, however, may well be falling demand owing to a new economic slowdown that expanding debt can no longer cover up. Recall that the real-estate crash that instigated the Great Recession was unforeseen by Ben Bernanke—former chairman of the same Federal Reserve that has since used money printing (“quantitative easing”) as a means to prop up the economy.
Does the recent oil-price drop mean the economy is in for another 2008-style crash? Not necessarily, but given the fact that none of the structural problems have been addressed, such an event could lead to broader difficulties. Note, for instance, that government debts continue to climb; and despite the farcical claims that the U.S. deficit is falling precipitously, the “total public outstanding debt” reported by the Department of the Treasury rose by over $1.1 trillion between October 1, 2013, and the same date in 2014. By contrast, year-over-year U.S. GDP growth in 3Q14 was only about $626 billion, meaning that economic activity grew only about $1 for every $2 of debt the federal government piled on—and that’s to say nothing about debt at other levels of government and in the private sector.
Data center operators may not feel too much concern directly over oil—although they may see it as an opportunity to replenish their diesel supplies as prices fall. But the economic instability that such a huge crash suggests is something that these operators may need to consider, since broader economic slowdowns will invariable hit the IT/data center markets (perhaps less strongly than other sectors, however).
Doug Mahoney at Green Data Center News said, “Temporarily cheaper oil is bound to put a slowdown in green data center movement, but it can also provide opportunities if properly managed.” Given that data centers rely primarily on coal and natural-gas power, the connection is indirect, however. Lower oil prices do decrease many business expenses, but the typical data center isn’t powered by oil. Nevertheless, even the impression of falling energy prices could indeed reduce the perceived incentive to improve energy efficiency.
Done properly, energy-efficiency improvements will always provide some return, regardless of energy prices (barring sufficiently steep, prolonged declines relative to the capital expense and depreciation of efficiency improvements). But if data center operators feel any pressure in the area of spending, particularly if energy prices fall or appear to be on the brink of falling, then efficiency projects could suffer. For instance, InformationWeek’s Outlook 2015 survey indicates that “a sizable number of companies think they can cope with rising demand for IT without increasing spending.” Given human nature, the likely driver of “do more with less” is the sense that less is available to do more with—in other words, many company executives apparently don’t feel like they’re swimming in available funds for IT.
Mahoney observes that “if you happen to be in an area where falling oil prices are leading to falling energy prices, you need to think long term. Accelerating conservation and renewable energy plans, not putting them off, should be a priority.” Indeed, falling or even steady energy prices could create a better opportunity to invest in greater efficiency, particularly assuming that prices will resume rising in the near future.
In addition, lower energy costs—should they materialize for data center operators—might not stick around, regardless of market conditions. Debt-ridden governments desperate for more money may lose out on tax revenue because of the lower prices. And if you think like a politician, the logical conclusion is that you might as well raise taxes, since it won’t hurt consumers any (after all, taking away the savings leaves you right where you were before the price declines). Thus, in the current economic and political climate, data center operators should never count on falling energy prices as being more than a temporary mirage: governments at all levels will be unable to resist the temptation to raise taxes. Furthermore, don’t expect them to repeal those tax increases should prices rise again: the result will simply be greater expenses all around.
Falling oil prices, if they persist, could harm alternative-energy manufacturing, which could also indirectly affect data center operators that are considering addition of, say, solar infrastructure. According to MarketWatch, “Solar stocks have been caught up in the selloff created by lower oil prices...Crude has fallen about 25% since September, roughly mirroring the decline in solar stocks in the same period.”
The article does note, however, that “solar fundamentals are much more connected to government policies and to the price of natural gas, which powers most of the electricity consumed in the U.S., or the price of coal, electricity’s fuel of choice in many parts of the world. Analysts do not expect oil’s price slump to have any effect on solar demand.” Thus, the connection between oil and solar stocks (or other alternative energy sources) may be more mental than fundamental. Either way, however, if the plunge in oil price is indicative of slowing economic activity, solar manufacturing may be in for the same bumpy ride as the rest of the economy.
The crash in the price of oil has little direct influence on the data center, which runs on energy from different fuels (except, perhaps, in the case of emergency generators, which consume diesel). If it remains an isolated phenomenon, the potential effects are likely to be more psychological, possibly leading to reduced emphasis on energy efficiency. If the decline has broader macroeconomic implications, however, then the results could more directly affect data center operators. For some time, for instance, many pundits have suggested that technology stocks are in a bubble; oil, like real estate, could be just the pin to prick overpriced assets into deflation. The results for data center operators could easily resemble the conditions of the Great Recession—which some economists think never really ended, but has only been hidden by debt.