Welcome to Energy Source, coming to you from New York and Washington.

Despite intensifying tensions in the Middle East, global oil supplies will substantially outstrip demand this year, according to a report by the International Energy Agency.

While weak consumption in the US and China will dampen appetite for oil, production is expected to rise to 104.9mn barrels per day, outstripping forecast demand by 1.1mn b/d. This trend is set to continue for the next five years.

Absent a “major disruption”, the IEA says its prediction should hold water.

Enter Donald Trump, who teased oil markets by saying the next week would be “very big” in determining the outcome of the war, saying the US “may” or “may not” join the fray and assist Israel in attacking Iran.

Trump’s remarks sent the Brent crude benchmark down by 3 per cent before it pared back some of its losses.

At the time of writing Iranian oil flows have not been disrupted. But what happens next is anyone’s guess, even Trump’s.

“I mean, nobody knows what I’m going to do,” he added.

Today’s newsletter includes a look at utilities’ uphill struggle to serve the booming AI data centre industry, while my colleague Jamie Smyth caught up with Bernard Looney, BP’s former CEO.

Thanks for reading, Martha

Interconnection queues are bursting at the seams, as tech companies tussle to hook power-hungry data centres up to grids across the country.

If data centres are onboarded faster than new power plants can be brought online, consumers could face soaring energy costs and electricity outages, warns energy consultancy Wood Mackenzie in a report.

“There is a risk, especially in deregulated markets, that we will make commitments to build data centres and the sufficient generation won’t be there,” said report co-author Ben Hertz-Shargel.

“In the future we could end up in a state of imbalance where we face not only blackouts but severely increased prices.”

One of the biggest challenges is predicting future data centre electricity demand. While energy investors plan on 30-year timelines, tech companies have a shorter-term view, being subject to uncertainty over AI’s profit outlook.

While Wood Mackenzie is tracking 134GW of proposed data centres across the US, interconnection requests far exceed this, due to developers hoarding spots in multiple queues, hoping one of them will pay off. Developers are looking outside of hubs such as Virginia and Texas at states including Pennsylvania, Ohio, Indiana and Iowa, where they are banking that connection times will be faster.

Some data centre developers are trying to bypass the interconnection issue by developing their own off-grid power supplies, both as a bridge solution until they can hook up to the grid and as a long-term contingency.

Project Stargate, a $500bn AI infrastructure initiative backed by OpenAI and SoftBank, has applied to build a natural gas plant at its site in Abilene, Texas, which would provide its data centre there with 360.5MW of power.

Last week, Meta signed an agreement with XGS Energy to develop 150MW of advanced geothermal electricity to power its AI efforts.

Technologies such as small modular nuclear reactors — which can provide about a third of the power of a conventional plant — are the subject of much industry hype, with backing from companies such as Amazon, Google, Microsoft and OpenAI.

But these projects are hard to pull off. Data centre power demand can vary from minute to minute, and grids are better equipped to deal with the fluctuations. Finding adequate land and securing air permits is also a challenge.

“The challenge is leaving a world where tech cycles move very quickly to the world of infrastructure, which moves more slowly,” said Joseph Majkut, director of the Center for Strategic and International Studies’ energy security and climate change programme.

“I expect it could be a successful model over time, but I think the reality of building large industrial projects is starting to impose itself on the tech community.”

The structure of energy markets across the US will also determine whether supply will match demand and keep energy bills from rising.

Utilities that are best placed to handle massive demand growth are vertically integrated ones — such as Southern Company — which own and operate generation, transmission and distribution, and only commit to serving new loads when they can ensure they have the power to do so reliably.

In deregulated markets such as Texas’s Ercot — where electricity generation is opened up to competition — utilities only look at the transmission upgrades that would be required to safely serve the load. This means that data centre additions can far outstrip new energy supply.

In regulated markets investment can be allocated to serve large loads, whereas in deregulated markets the price of wholesale power provides a signal for new investment.

But even in markets such as Ercot, forward prices are below the level necessary to incentivise new entry, leading to the recent cancellation of plans to build new gas-fired generation in the region.

High power costs would incentivise new investment, but that would also mean increased prices for consumers.

“While this is the way efficient markets work for all commodities, in electricity, a very localised market in which politicians can be blamed for lofty rates, there is much more likely to be political outcry as a result of large-load demand growth,” said Wood Mackenzie’s report. (Martha Muir)

The challenge of building out enough energy infrastructure to power AI data centres is similar to the one faced by the US government during the space race in the 1960s and 1970s, according to Bernard Looney, the former chief executive of oil major BP.

Looney, who resigned from BP in 2023 over his failure to disclose the extent of past relationships with female colleagues, is now chair of US-based data centre group Prometheus Hyperscale. He said the solutions to the global power crunch would be found only if government and industry mobilised a similar effort to that challenge by “focusing on skills, policy and technology”.

“There will be the same amount of power in data centres as [there is in] the Japanese economy by 2026 . . . the scale of growth here is extraordinary. It will require some very different thinking,” he told Energy Source on the sidelines of the Enact summit, a discussion between energy industry leaders, policymakers and Big Tech executives in Washington.

Prometheus, a start-up, plans to build a $10bn data centre in Evanston, Wyoming, initially with power capacity of 1.2GW. It is one of a number of developers seeking to capitalise on the AI boom, but they all face a big challenge in sourcing enough reliable, around-the-clock electricity to keep their data centres running.

Looney said Prometheus would initially build its data centre facility as an “island” outside the existing electricity grid while it sourced power from natural gas, wind energy and nuclear power through a partnership with the Sam Altman-backed small modular reactor developer Oklo.

“We’re going to build an island, and then in time, we’ll connect to the grid,” he said, adding that Prometheus would “push power to the grid” rather than consume from it. “We’ve got natural gas, two pipelines. We’ve got a massive area of land for wind and an agreement with Oklo around SMRs.”

Looney is also a board director at XRG, the international investment arm of Abu Dhabi’s national oil company. He has a role identifying potential energy targets for the group, which last week submitted a $18.7bn bid for Australia’s second-biggest gas producer, Santos.

“Santos has got some fantastic gas assets, including, by the way, oil assets in Alaska, but predominantly some fantastic gas assets in Asia and in Australia,” he said.  

Looney said a deal with XRG would be a great fit for Santos because the Australian company would receive investment to help it grow.

“It remains Santos, in some ways, but has the power of XRG behind it. And for XRG, clearly, it’s a fantastic business opportunity, a fantastic opportunity for growing in one of the three core segments.”

XRG was focused on investing in natural gas, petrochemicals and low-carbon businesses, said Looney, adding that natural gas remained a priority for the group in terms of future M&A.

“On the chemical side we’ve done a lot in XRG . . . we clearly have a focus on gas and I think Santos is part of that focus now. Will we do more at XRG? I’m sure we will if we can find the right deals.” (Jamie Smyth)