Hit on tech billionaires’ wealth?

In financial markets, the valuation of tech billionaires sometimes hinges on forces distanced from Silicon Valley. The war in the Gulf offers a grim and stark reminder. Oil prices swung sharply over the past 72 hours, with a shocking 40-50 per cent rise in a day or two, and an equally stunning fall by a quarter in 24 hours. As nations get ready for huge hits on GDPs, despite the slicky respite, some of the tech billionaires across the world took huge hits on their wealth.

Since the air strikes on Iran, and the Iranian response, tech stocks moved unevenly, rather than completely collapsing. At the end of the first week of the war, the tech-driven Nasdaq in the US was tad higher since the conflict began. While the Tesla shares fell 2.7 per cent in early-March trading, the semiconductor sector experienced sharp swings. Indeed, many jumped up as investors rotated back to the AI and AI-related firms. Nvidia rose 2.7 per cent, Broadcom gained 4.6 per cent, and AMD and Intel bumped by five per cent each.

For the tech billionaires, the impact is volatile, not destruction. Elon Musk is still the world’s richest person ($840-$850 billion), and Google co-founders, Larry Page and Sergey Brin, are worth $250 billion and $231 billion, respectively. The distinctions between the current Middle East crisis, and the earlier wars, the Russia-Ukraine war in 2022, and the First Gulf Crisis (Iraq) in 1990, are stark. The second mattered little to the fledgling tech firms, whose valuations were puny. The third decimated tech within no time. Despite oil being on a boil now, investors crashed most stocks, but did not dash out of tech.

During the First Gulf War, crude prices doubled from $17 to more than $35 a barrel within months. But tech firms represented a small share of global equity markets, and the wealth of the world’s richest was dominated by brick-and-mortar giants, and energy magnates. During the 2022 energy shock triggered by Russia’s invasion of Ukraine, tech stocks bore the brunt of the market corrections. Brent crude surged above $120 a barrel, and approached the $130 mark. The Nasdaq Composite index fell by more than 30 percent from its 2021 peak as the investors reassessed the tech firms’ multiples.

At the beginning of the Russia-Ukraine war, Tesla’s share dropped over 60 per cent from its highs. Amazon declined by roughly half from its peak level, and Meta Platforms lost more than two-thirds of market cap. For the billionaires, the shift translated into enormous swings in personal wealth. Elon Musk’s worth fluctuated by over $100 billion, as did the wealth of Amazon’s Jeff Bezos and Facebook’s Mark Zuckerberg. Over time, things stabilised. Ukraine did not capitulate, and Russian oil found its way to new and bigger consumers like India and China via legal and semi-legal routes. The wealth juggernaut accelerated.

What makes the current episode more complicated is that the market response has not yet followed the clean pattern seen in 2022, or as expected and estimated by the experts. Oil prices reacted quickly to the tensions in the Gulf, as Brent crude climbed up to $120, and then came down to $90 within no time. The reaction in tech stocks was far less one-directional. On several trading days, the Nasdaq held up. This reflected the growing dominance of large tech firms in global equity indexes, and continued investor enthusiasm around AI.

Yet, if the Iran war continues and escalates, the changes in global interest rates, bond yields, inflation, and GDP growths will finally impact the tech socks. Another crucial area relates to the semiconductor supply chain. The global chip industry depends on a network of special materials and industrial gases, some of which originate in the Middle East. Analysts warn that prolonged conflict can disrupt supplies of helium and other gases. Helium is used in the cooling and leak detection processes in chip fabrication. Any disruption will add another layer of pressure to the sensitive semiconductor ecosystem.

Overall supply chains represent another transmission channel. The tech industry relies on a complex network of components, fabrication, and logistics. Semiconductor wafers are produced in Asia, assembled into chips in other regions, and shipped to manufacturers. Each stage depends on transportation networks whose costs rise with fuel prices. The pandemic-era supply chain crisis provides a preview. Shipping container rates surged to unprecedented levels between 2020 and 2022 as logistics struggled with disruptions and fuel costs. Moving a container from Asia to Europe or North America became several times more expensive. Tech firms grappled with the higher costs.

The expansion of AI creates new industrial-scale computing facilities that consume enormous electricity. Data centres require continuous power. Estimates suggest that training a single large language model consumes several gigawatt-hours of electricity, and hyperscale data centres require power capacities comparable to small cities. Energy costs form an important component of the economics of AI. Tech firms need to factor electricity pricing into costs. Nvidia has seen its valuation surge due to higher demand for computing power. Yet, the profitability of AI workloads depends heavily on the costs of operating the data centres, which is influenced by the energy markets.

When oil prices rise, investors rotate capital toward sectors that benefit from energy inflation. Firms engaged in energy, mining, and industrials outperform tech stocks. The 2022 market cycle demonstrates this. Energy firms were the best-performing ones in the S&P 500. Tech sector experienced their deepest corrections since the pandemic. Capital markets respond through the venture capital ecosystem. This capital slows when borrowing costs increase, and liquidity is scarce. Start-ups face a more cautious environment. Data from funding trackers showed that global investment fell significantly in 2022 and 2023 compared to the record levels in the previous two years.

As we mentioned earlier, there is a paradox. High energy prices can create headwinds for tech valuations in the short term, and even strengthen the long-term case for some firms. Tesla’s growth rests on the transition towards electric mobility. When gasoline prices rise, consumer interest in EVs increases. Governments accelerate incentives for clean energy. The result is an interaction between short-term macro pressures, and long-term tech trends. Oil shocks compress valuations, but the same can accelerate investments. An oil tanker in the Strait of Hormuz may seem distant from the headquarters of tech firms in California or Shenzhen. Yet, the two worlds are connected.