Publications: Notes at the Margin

Oil's Stake in the AI Boom; China's Long-Term Threat to Oil (November 24, 2025)

 

Artificial intelligence (AI) dominates everything. Google reports 9.7 billion hits for the term “AI” in its history, 4.3 billion of which came in the last year, and 635 million just last week. The November 20 announcement that the United States and Saudi Arabia would jointly construct AI data centers in Saudi Arabia increased interest. However, the subject was on everyone’s mind well before Saudi leader Mohammed bin Salman arrived in Washington to a gold-plated welcome from President Trump.

 

Interest in AI, especially the construction of needed data centers, should also be on the radar of anyone in oil, as such construction is driving increased use. US crude oil and petroleum product consumption would likely be lower today than it was one or two years ago, absent the rapid expansion of data centers. Oil use is declining in countries where data-center projects have not taken off. Continued increases in oil consumption will likely require the continued expansion of data centers. Indeed, consumption growth looks particularly vulnerable to the end of the AI boom, an end that today seems out of sight.

We focus on the links between AI construction and oil use in the first part of this report. In the second, we examine China's manipulation of the rare-earth magnet market. China has dominated this business by keeping magnet prices low. The latter limits the ability of private-sector companies outside China to compete. China’s control of rare-earth magnets will enable it to command many other markets, including autos, key defense sectors, and most advanced manufacturing processes, perhaps even airframe production. Attempts to protect domestic manufacturing through tariffs and quotas, such as those imposed by the European Union and the United States, will ultimately fail because firms competing with Chinese counterparts must buy the key inputs China controls or rely on inferior substitutes produced elsewhere.

 

In short, China is stealthily taking control of essential manufacturing sectors. In the long term, fossil fuel producers could see markets shrink as China’s dominance spreads.

 

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