Nvidia (NVDA +0.71%) is the face of the artificial intelligence sector thanks to its high-powered microchips. The stock is down over 15% from its 52-week high, with a notable pullback coming as oil prices have been on the rise. While the direct connection between Nvidia and oil isn't massive, there is an important relationship between AI and oil that you can't ignore.
AI does not live in isolation
You could argue that high energy prices will make using AI more attractive for companies because it will help them to reduce costs. That's not an unreasonable view at all; however, it has to be put into a bigger context. The major push right now with AI is building the AI backbone to support wider adoption of the technology. In other words, AI stocks aren't the key to the long-term AI story at the moment.
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The key is building data centers to house AI. And building the capacity to power the power-hungry technology. These are not easy tasks. They are capital-intensive and time-consuming. And AI won't be able to gain widespread adoption without this backbone being created to support it.
If you are looking to invest in AI, you have to also examine data center owners, electricity companies, and construction industries, from building supplies to engineering concerns. The ecosystem around AI is huge.
Energy costs matter, and they are rising
High oil and natural gas prices are a major problem throughout the AI ecosystem. For example, natural gas is an important fuel for many electricity utilities. Often, there is a mechanism for passing higher natural gas prices directly through to customers. So rising energy costs can directly affect the operating costs of data centers running AI. Higher costs could limit the financial benefits of using AI, leading potential customers to hold off on investing in the technology.
NASDAQ: NVDA
Key Data Points
However, that's just one fairly direct example. A less direct example is the price of diesel fuel. Diesel is used to power large machines like backhoes, tractor-trailers, and ships. High oil prices will make it more expensive to mine iron ore, which is used to make the steel used to build data centers. It will make it more expensive to transport the iron ore from where it is mined to where it is turned into steel. It will make it more expensive to get that steel to the site where the data center is going to be built. The same dynamic holds for the electrical infrastructure needed to deliver power from where it is generated to where it is needed.
So rising oil prices are a headwind that AI investors can't ignore. However, the most worrisome issue could be a broader one. Higher energy prices don't just make AI more expensive, it makes everything more expensive. There is a very real risk that high energy prices could push the economy into a recession.
If there is an economic downturn, it is likely that big capital investment plans will be delayed or even canceled. Since spending on the AI build-out is one of the big capital investment themes right now, a recession could quickly crimp the cash going into the infrastructure AI needs to achieve widespread adoption. In other words, if you are following AI stocks, you also need to look at the big picture, economically speaking.
Oil and AI aren't a good mix today
There's no way to predict what will happen in the Middle East, where a geopolitical conflict has upended global oil markets. However, the resultant higher energy prices are very likely to put a damper on the AI build-out. If oil prices continue to rise or linger at high levels for a long period of time, the impact of $100+ oil could turn out to be AI's biggest risk factor.
While Nvidia's sales rose more than 70% year over year in its most recent quarter, that news wasn't enough to push the stock higher. With high oil prices arising as an AI headwind, you now need to consider what happens if the company's sales start falling short of investor expectations.
