When politicians talk about what will make a country successful, they often mention an educated workforce and a drive for innovation.
And yet there’s an underlying element that’s becoming increasingly necessary as technology advances: energy, said Matt Stephani, president of Cavanal Hill Investment Management, Inc.*
“Access to cheap energy is going to be what determines the economic winners and losers in the next 30 years. And so, frankly, what we should be doing is seeking reliable, safe, secure sources of energy and helping our partners do the same.”- Matt Stephani, president of Cavanal Hill Investment Management, Inc.
Of course, energy’s key role in economic growth is nothing new: think of electricity’s role in ushering in the Industrial Revolution. However, what is new is the technology that energy will be used for—artificial intelligence (AI), which experts say has tremendous potential but will require large amounts of electricity. Additionally, there’s the backdrop of deglobalization in which the next 30 years of technological progress will take place.
Will AI be at the center of a new industrial revolution?
Excitement about AI has been driving the “Magnificent 7’s” performance in the stock market (and, arguably, the S&P 500’s performance in general). However, for economists, much of the enthusiasm about AI has to do with its potential impact on productivity.
Based on the Solow model of economic growth, three factors influence the growth of an economy—an expanding labor force, increasing worker productivity and the level of capital, noted Brian Henderson, chief investment officer of BOK Financial®. “Artificial intelligence has the potential to increase the output for every hour worked by an employee and to increase productivity rates overall in the economy,” he explained.
“When AI increases productivity, everyone is a winner. The economy could grow faster without inflation increasing. Income levels could rise faster, and people’s standards of living could increase. Corporations could be more efficient and profitable, so their stock prices would rise. Meanwhile, governments could gain increased tax revenues.”- Brian Henderson, chief investment officer of BOK Financial
This increased productivity will include workers using AI to perform tasks that AI usually can do more efficiently and quickly than humans, such as coding a computer program, Henderson said. This also would enable people who have no programming experience to create programs.
However, AI can’t entirely replace human workers, either, he cautioned. “AI tends to do some skills, such as basic math and retaining information, better than most humans,” he explained. “Yet there are some skills that humans will always do better than a computer: teamwork, leadership, soft sales, entrepreneurship and being ethical, for instance. Plus, economic expansion through AI will depend on solid understanding and effective mitigation of AI’s risks.”
Energy to determine the economic powerhouse of the future
However, running AI takes energy and, the more advanced it becomes, the more energy it will require, Henderson and Stephani both noted.
“You’re electrifying jobs when you go from five accounting clerks inputting data to one artificial intelligence system doing it,” Stephani said. Rather than the work being accomplished through the exertion of human energy, it will be accomplished by AI running on electricity, he explained.
The amount of energy required for the most advanced AI systems could reach unforeseen levels. For example, Microsoft’s planned Stargate AI Supercomputer may require as much as four to six gigawatts of power, almost the equivalent to the power needs of a large city such as New York.
This power-intensive technology is being developed in the midst of deglobalization, Stephani noted. As the world economy is becoming less globalized, more companies have been moving their manufacturing out of China to the U.S. and neighboring Mexico, which is amplifying the need for cheap, reliable sources of power, he explained. In fact, in 2023, Mexico surpassed China as the largest exporter to the U.S for the first time in over 20 years.
Presidential election will shape U.S. electricity generation
And now, experts say that the upcoming U.S. presidential election will play a significant role in the future of U.S. energy.
While both parties see energy as important to the country’s economic growth, whoever wins is “likely to shape the future of electricity generation and transportation fuels in the U.S. economy over the next decade,” Stephani said. He detailed the following possible scenarios:
If a Democratic candidate wins, they may take steps to lower U.S. oil demand by increasing regulations. They might also attempt to use liquified natural gas (LNG) export caps to hold down natural gas prices, resulting in uncertainty that would likely slow the pace of LNG facility build out. This might negatively impact allies such as Europe, who depend on U.S. natural gas. There may also be increased subsidies for wind and solar, as well as a reduction or cap on coal shipments out of the U.S., Stephani said.
Meanwhile, if a Republican candidate wins, it would likely be positive for coal and natural gas and negative for solar, wind and hydrogen power, Stephani said. Coal will continue to be mined and shipped to China and India. A Republican win may also result in reduced regulation on the U.S. oil and gas industry, increased LNG shipments and reduced stimulus for electric vehicles, he explained.
But there’s one energy source that’s likely to be supported in either scenario, Stephani continued: “Nuclear is probably a win either way.”
Looking forward, whichever candidate becomes the next president, the U.S. will need cheap, reliable energy to fund the next 30 years of technological advancements, experts agreed.
“If we think of it as, it’s the year 2050 and who won the economic war, the answer will be the country with access to reliable electricity. Having access to cheap electricity is going to determine who will be the economic powerhouse and who will win the manufacturing and technology race currently being driven by AI.”- Matt Stephani, president of Cavanal Hill Investment Management, Inc.
*Cavanal Hill Investment Management, Inc., is a subsidiary of BOKF, NA.
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