Water Privatization: Let’s Cut the Hysteria

In an editorial published this week in Nature, Frederick Kaufman, a journalism professor at the City University of New York, cries out against the perils of a global water futures market. He cautions that “Financial forecasters perceive that much like traditionally traded commodities — precious metals, for example — the useable water of the future will be so scarce as to need to be mined, processed, packaged and, most importantly, moved around the world.”

Kaufman goes on to say that “The reverberations of a global water futures market can hardly be imagined. This much is clear: a water betting game will leave crops thirsting and push the global price of food far beyond the peaks of the past five years.”

Calm down, professor.  It ain’t gonna happen that way.

It is highly unlikely that water will be traded globally – it certainly won’t be shipped around the world — nor will its price exhibit the market volatility of oil or corn, for many reasons.  I’ll highlight three big reasons here.

1)      Water Is Too Heavy to Move

Water weighs 8.34 pounds per gallon.  That makes it very expensive to ship or otherwise transport to distant markets.  We move oil around the world because it has very high monetary value that far exceeds its shipping cost.  Crude oil is selling for more than two dollars a gallon, but it costs only about five cents a gallon to ship it.

The most expensive source of water– desalination of seawater or brackish groundwater – costs less than a penny per gallon to produce.  That’s why we don’t see tanker ships moving bulk water around the world: shipping is expensive, and it doesn’t cost all that much to access water locally, even in the most water-scarce regions of the world.

But investors could build pipelines or canals and move it long distances across land or under sea, right?  Not likely to happen in most places.  Long-distance water importation is the next-most expensive way to supply water.  It takes a helluva lot of energy to push water over long distances.  The California State Water Project – which moves water from northern to southern California – and the Central Arizona Project – which moves water from the Colorado River to Tucson – are the biggest electricity hogs in those two states.

Water will never be bought, sold, and moved around the planet in volumes similar to other market commodities unless its price escalates exponentially.

 2)      When the Price of Water Goes Up, Demand Goes Down

Which leads me to the second reason why water markets won’t behave like commodity markets:  we already waste so much that when someone raises the price, it’s easy for us to simply use less.

Because water conservation is by far the cheapest way to meet growing water demands, cities, farmers and everyday citizens will much prefer to exhaust their potential water savings before paying to import water, desalt it, or ship it from some far-distant country.

Many cities have been able to cut their water use by 20-30% with little pain, and savings of 10% or more can be found on most any farm.  Because so much water is consumed in agriculture, a savings of just 10% on farms would free up as much water as is presently being used in all the cities on Earth.

So, if someone is trying to profit from speculating in water, potential buyers like cities and farmers will respond first by using less.

3)      Exporting Water Will Churn Up Local Resistance

The idea of exporting water from one place to another is a lightning rod for inflaming local opposition.  When communities perceive that their future needs and opportunities could be foreclosed by the export of water from their local freshwater sources, they will not be complacent.

One example: In 1998, when the Ontario government in Canada issued a permit to a company seeking to ship 160 million gallons of Lake Superior water each year to Asia, the resulting public outcry was so strong that it catalyzed an international agreement among eight states and two Canadian provincessharing the Great Lakes.  The Great Lakes Annex will make large-volume exports of water from the Great Lakes highly unlikely in the future and intense scrutiny a certainty.

 

 

Water is Local, Not Global

Despite these realities, water markets are not such a bad idea.  In fact, there are some very good things that can result from well-managed and transparent water market systems.  But water markets and those who profit from them will necessarily be local in nature, not just because water cannot be profitably transported over long distances but also because a successful investor will need to spend considerable time getting to know the nuances of the local water situation before making a smart bet.

I’ll illustrate the benefits and challenges of local water markets with a real case study.  In 1993, a federal court case over endangered species resulted in a cap, or limit, on the total volume of water that could be withdrawn from the Edwards Aquifer in central Texas, the source of water for San Antonio, Austin and other smaller cities.  That’s a key element of a viable water market: limiting the supply.

The Edwards Aquifer Authority was subsequently formed to manage water extractions from the aquifer, which included the issuance of water permits to cities, industries, and agricultural operations that specified the allowable usage of water.  That created another key element of a water market: well-defined property rights that could be bought or sold.

In the first decade of the Edwards Aquifer Authority, the value of water in the Edwards Aquifer climbed six-fold.  If you were smart enough to acquire an aquifer permit from a willing seller during that period, you would have made a nice profit.  But these windows of investment opportunity can be very short-lived.

As the price of water in the Edwards Aquifer started going up, everyone started conserving it.  This is one of the very attractive benefits of water markets:  they can be powerful catalysts for water conservation. The San Antonio Water System (SAWS) has been the biggest buyer of Edwards Aquifer water, but as the price of that water rose, they soon realized that they could do better by getting their customers to use less.  SAWS helped San Antonio residents cut their water use by nearly half.  SAWS also tapped into alternate local sources of water at lesser cost than buying Edwards permits.  Because SAWS has managed and diversified its water supplies so well, its customers enjoy water utility rates that are among the lowest in the country. (See “San Antonio’s Popular River Walk Relies on Recycled Water.”)

The bottom line for investors:  if you got into and out of the Edwards market at the right times, you would have made a pretty profit.  But you might be losing your shirt now that your biggest buyer is going elsewhere.  To understand and profit from these ups and downs, you would need to pay very close attention – not something that an investor on the other side of the world is going to be able to do.

The Sober Realities of Water

Professor Kaufman is not the first person who has raised the alarm over the false bogeyman of water privatization.  Even the chief economist at Citigroup expressed similar prophesies of global water trade in his speech at last year’s World Water Forum in Marseille.

Voicing or publishing such scenarios may grab headlines and alarm the unknowing, but obfuscating the physical, economic, and political realities of water only diverts attention from the real problems posed by water scarcity.

Water scarcity does create investment opportunities, for better or for worse.  But the best way to make money from water is to invest in technologies and programs that enable us to use or waste less of it.

The only way out of water scarcity is to consume less water.  If investors and markets can facilitate or incentivize that, let the games begin.