The paradox at the heart of the AI debate
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Investors in energy stocks panicked this week over the release of a new, cheaper AI model, ignoring an argument that reducing the energy needs of such models could actually increase demand for energy overall.
Why it matters: The news could end up being bullish for those stocks, which lost more than $40 billion in value on Monday.
How it works: The Jevons Paradox, as first formulated in 1865 by English economist William Stanley Jevons, states that greater efficiency in the use of any given resource can result in increased demand for that resource.
- His example was coal: After the Watt steam engine was introduced — which burned much less coal than its predecessors — demand for coal rose substantially, as Watt's engines were built into a wide range of applications.
What they're saying: "This positive supply shock will massively increase demand for AI compute and applications of all sorts," says Nouriel Roubini, an economist at New York University.
- Morgan Stanley energy analysts concurred in a note Tuesday, saying "there are multiple indications" the Jevons Paradox applies to the cost of compute in AI applications.
Between the lines: The cost of compute has been one of the primary constraints in the development of AI. If it comes down, then it is possible that many more companies and research departments will get into the space.
- It's worth noting that DeepSeek was developed by a Chinese hedge fund, rather than by a dedicated AI company or university department.
- Cheaper AI might also mean AI getting embedded much more rapidly in things like consumer products.
Driving the news: Notwithstanding the knee-jerk investor panic, Chevron and GE Vernova said Tuesday they are building new power plants co-located next to data centers.
- The plants will generate enough electricity to power 3 million homes, but won't even be connected to the grid. The data centers will use every watt they produce 24/7.
The bottom line: Between electric vehicles and the seemingly bottomless thirst from data centers for electricity, don't hold your breath waiting for demand to fall.
