The Economics of Water
Updated: Sep 10
Water covers 71% of our planet's surface and sustains all life on Earth; it exists at the heart of many of the industries that hold up our economies and without it, we couldn’t survive. However, there is one massive problem with this vital liquid - we're running out of it. There is a set amount of around 333 million cubic miles of water on Earth, and there always will be, but of that 97% is salt water and 2% is in the ice in the Poles. This means all of the water that human kind relies on for our existence is just 1% of the water on Earth. So when experts say we are running out of water, what they really mean is that the fresh water we have access to is depleting. As growing populations increase demand and climate change shrinks reserves, the future of water's involvement in agriculture and industry is under threat. This growing scarcity became big news for investors in December of 2020 when water as a commodity entered the stock market for the first time, meaning traders can now bet on the future of the most valuable commodity on Earth.
So what is the situation of water scarcity, which can now be so profitable for investors? The World Bank classifies water scarcity as individuals in a determined area having less than 1000 cubic metres of water. An example of water scarcity is Beijing, where in 2014, the population of 20 million had access to 145 cubic metres each. Another famous incident is Cape Town. In 2018, after years of drought, Cape Town announced it did not have access to enough fresh water reserves to sustain the life of the nearly 4 million inhabitants. They started a countdown to 'Day Zero' when water would be shut off and the public would have to use ration cards to collect water from the Government. Such examples are becoming increasingly common and don't just impact dry areas. Estimates give London 20 to 30 years before demand outgrows supply and similar predictions exist for Melbourne, Mexico City and Tokyo. Unless water scarcity is addressed through systemic change then by 2040 most of the world won't have enough water to meet demand.
This is why investors see it as a great buy, because despite scarcity being an obvious issue for years, many national governments haven't invested in solutions, meaning investors can be almost certain that prices will rise as resources deplete. Michael Burry has been one of the high-profile supporters of investing in water stocks, and now that California's $1.1 billion water market has opened via the Nasdaq Veles Water Index, investors can grab contracts representing roughly 3.26 million gallons which are financially settled. There are doubts about the possibility of global trading, with California's bubbled environment as an agricultural giant. But regardless of the way the market grows, the certainty is that scarcity will skyrocket water prices in the next decade.
This scarcity is the result of a multitude of problems in the way we view water as a commodity, and a number of different solutions have been offered, all of which will have different impacts on the economy. Aside from the results of climate change, the leading problems are pollution, poor infrastructure and waste. Experts such as Betsy Otto say they all lead back to one problem; water doesn't have a high financial value. In the UK, a litre of water costs less than 1p on a water meter and this can be even lower for non-household customers. Of the 1% of all water usable to humans on earth, only 8% is consumed by personal use. To compare, 70% is used in Agriculture and 22% in industry. Therefore, when we look at the issues with water usage, we're usually looking at issues with how companies use it. Cape Town could have ended their crisis in 2018 if they had access to a fraction of the water used in South Africa's wine industry and similar patterns occur internationally through India and China, where the limited water supply is bought up at a shockingly low rate for business use. Because water is so cheap, most companies think nothing of unloading waste into it or losing large quantities in transportation and this is one of the reasons so many want to see the price of it increased.
As cities start to meet their 'Day Zero', the price of water will skyrocket in the markets and governments will start to limit it to conserve it, again increasing scarcity. This potential cycle of increasing cost would mean agriculture and industry would have to transform to function. Water is hidden in every product we consume, and agriculture especially uses it at an unparalleled rate. A quarter pound hamburger uses 1650 litres of water to create, in a large part due to cattle feed such as alfalfa which requires 510 litres per kilogram, yet it is continually grown in the desert where there is constant sun and land is cheaper. Southern California uses 2 trillion gallons of water a year to grow alfalfa, at cost so low that it doesn't matter that they're using it hundreds of miles from the source (the Colorado river) leading to huge losses through leaks along the way. As water becomes scarcer, such decisions will cost more, and eventually become unprofitable, completely upending the agricultural industry, especially in India and China. Putting a higher price on water is a key belief for those who think the onus of conservation is on companies as it would give them the incentive to use less and conserve it. Farmers and business owners pay almost nothing for water use and if the price were to rise, they would have to make massive changes to their structures and practices. Whole industries would have to rethink the way they included water in their products. In the present day, those changes aren't happening at the rate they need to, and the waste continues.
The debate on the responsibility of the public vs businesses provides a range of different potential outcomes. The UK Environment Agency reported in 2019 that while corporations would have to lead change in how water is used and that price increases were a possibility, they also wanted to focus on influencing the public to use less water. Think tank SustainAbility polled 1200 sustainability experts and concluded that individual lifestyles are the area that needs biggest change. While personal use is far below industrial and agricultural use, the consensus is that it can change with the least impact on the economy, as it doesn’t force huge changes on industries. Resilience experts like Arnoldo Kramer suggest a base rate of water should be provided free to the public, and an additional charge used over that amount to incentivise reduced use. But many disagree with this approach, citing the exorbitant amounts of water agriculture uses as the area for greatest change, and the fact that water has been considered a human right by the UN since 2010 and therefore shouldn’t be regulated for the public.
Whether or not the responsibility for change is on the public or corporations, the cost of water will rise. Calls for an increased price of water argue that it would force governments to invest in infrastructure to prevent losses through leaks. Broken pipes may not sound like a huge issue, but Mexico City loses nearly half their drinking water annually to it. Some governments are already making these changes, with Philadelphia tying water price to income levels, showing such change is already an option in America. Additionally, if the financial value of water was higher, expensive treatments like desalination could see more investment. Such changes could completely change the scarcity issues certain countries face, and many view an increased price in water for businesses as the only way to push for such innovations. These solutions could spell good news for established industries, but they shouldn't bet on personal changes and new investments to solve the crisis without affecting them; as mentioned before, agriculture uses 70% of the freshwater on earth so it's unlikely they'll get out of this crisis without drastic changes to their structure and profitability. All of these potential outcomes will create massive changes for the economy, as new technologies boom and historically successful ones fight to adapt.
There are many ways that the water crisis could go. Whether or not the cost of water is artificially increased to conserve it, we will see a natural rise in price unless investments are made soon to ensure its supply. The division on what solution will best solve the crisis means we cannot yet see exactly which industries will be effected the most but areas of agriculture and food production can expect the biggest hit. The OECD is promoting increased prices, and the UNEP has backed treating more water; there are hundreds of ideas on how to treat water scarcity, and who to target reforms and regulations at, all of which will have different effects on the economy. A high cost of water will increase the price of consumer goods, upend the way industry currently works and hit the poorest hard, meaning it's key to keep human rights as a part of this economic conversation. Other changes could also make early water investors rich or old industries poor and spark unprecedented spending in infrastructure and new technologies. Regardless of the debate, we're currently 9 years away from demanding 40% more water than we have to supply according to Un-endorsed projections. So we don’t have to wonder if there will be a drastic financial change, but rather when. With predictions of water investments paying off and un-adapted agriculture collapsing the only question remaining is who will be the winners, and who will be the losers in this financial upheaval?