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Water Privatization: Let’s Cut the Hysteria

Picture of ship towing iceberg
Some entrepreneurs have suggested towing icebergs to places that need freshwater, although challenges remain. Photo: SERPENT Project

 

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.

Picture of San Antonio Riverwalk
San Antonio's famous River Walk uses reclaimed water, part of a broader strategy of water conservation that has halved the city's consumption. Photo: Anthony Ortiz/My Shot

 

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.

Comments

  1. Stella
    northernCA
    June 24, 2013, 6:32 pm

    In the article you state “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.”
    What figures were used to estimate this? Thanks!

  2. Eric B
    Masachusetts-USA
    February 20, 2013, 2:04 pm

    They use tankers to move the water to China right? These water whores also dictate policy in Africa that taxes rainwater. You can’t collect rainwater there without being taxed. They sell bottled water for much more than Coca-Cola. Which holds the lock. It’s REAL, and won’t be any more fun if more droughts hit.

  3. Erin
    Tennessee
    January 30, 2013, 3:37 pm

    Water may be expensive, but its also sold for more than oil. Private water is sold at an estimated $1.25 a quart. My dad works for Nestle waters of north america . They came to their very small town of Red Boiling Springs in Tennessee and bought out all of the natural springs that made RBS famous at one time in history. They also bought up much of the public water there and water prices have been raised immensely there. It seems that they strong armed their way in taking advantage of the terrible local economy and promising jobs. The residents in this very small community regret the decision to let Nestle take their water. I wont go into detail because it would be very long winded, but some private companies such as Nestle are using very dirty practices of stealing water belonging to the people and then raising the prices. Look it up. Also the private water market isnt even regulated in the way public water is. The water in the man made lake in NEvada is srying up and is down almost 50 feet because of private companies pumping out the water faster than nature can replace it. That is the only place most of Cali and other arid areas get their water from. What happens when the water runs out? Also the Great Lakes ( my former home was on the banks of one of the great lakes ) are also being sucked dry at the tune of 90 million gallons per year per pump. Private companies bought the rights to the water for 100$ per year but they take as much as they want. Water levels are currently down 15 feet and streams are dying as a result. ( Look up dead stream) . Lets face it. As much as we want to think that water will never be a precious commodity, we all know when greedy unregulated corporations get their mitts on something, their only concern is money. Look at T Boone Pickett in Texas. He bought off a piece of land that sits on top of one of the main aqua firs in the US. Under Texas law, he can take all the water from it for free because he can get to it from his property. And he has no shame in telling others about his plans to steal land, buy off polititions and saying he will charge fortunes for his water. He brags about the billions of dollars he will make off of his “blue gold”. When private companies are allowed to control water that is meant for the masses, things will get nasty. We should be aware.

  4. Dan Auerbach
    Colorado, USA
    November 14, 2012, 8:24 am

    Great to see a thoughtful and coherent discussion of this topic.

    The physical characteristics and fundamentally “local” nature of water aren’t in dispute, but I think it’s worth noting a distinction between intercontinental transfers (i.e., across oceans or otherwise shipped) and transbasin diversions.

    The latter are already widespread and supporting direct (water rights) and indirect (virtual water in ag commodities) markets. Unfortunately, this has not always led to the conservation identified in the San Antonio example. This is due in part to:

    1) national economic policies that accept unfavorable direct costs for putative indirect gains in other sectors or because of political rationalizations (e.g., subsidizing cotton production in Central Asia with inflows to the former Aral Sea) and

    2) regional markets that gladly externalize long-term costs to deliver substantial near-term returns for investors, perhaps including those who can rapidly redistribute capital at a global scale (which is the antithesis of “wet, heavy and hard to move”).

    Hysteria is never helpful, and carefully structured markets may contribute to sensible water use, but as Dr. Richter is acutely aware, evidence to date indicates that governments need very strong encouragement to define and implement the sustainability boundaries that prevent abuses.

    Perhaps the appropriate boundary for intercontinental transfers is “zero”, regardless of the likelihood of long-term unprofitability.

    • Brian Richter
      November 14, 2012, 8:44 am

      Thanks for such thoughtful and cogent input, Dan. And thanks too for making the point that we need to encourage our governments to do the right thing with water. We should encourage them to optimize for three key factors when deciding how to source their next increment of water supply: (1) cost-effectiveness (conservation always wins here); (2) lowest energy implications of the water project; and (3) net positive environmental benefits. If those factors were given prominence in decision-making, and the decisions were made in a transparent manner, we might begin to make giant strides toward sustainable water use and management. It wouldn’t necessarily resolve the two issues you raise, but it would at least place some boundaries around the types of water projects that would be acceptable to the citizenry.

  5. Monika Freyman, Ceres
    Boston MA
    November 8, 2012, 10:09 am

    What a great conversation. I would like to build on Jon’s point that water may be too heavy to move around globally but the real issues in the future, I believe, are going to be conflicts between local communities, ‘outside’ industry interests in the local water, and agriculture. Hydraulic fracturing provides the perfect example of this conflict . On one end water is under-priced and perhaps one could argue under-appreicated while at the other industry is willing to pay a great price (which in turn helps fund water infrastructure projects). Locals communities justifiably see it as disturbing to consume such large quantities of water (and the water is most often truly consumed by being disposed down deep wells never to be seen again or too contaminated to be used again) to extract a resource such as oil and gas that ultimately could be substituted but also cry out when they must pay more to sustain that resource. How do we begin to manage this problem? Pricing? Cultural priorities? Local water use transparency?

  6. Fresh Water Systems Canada
    http://www.mywatercooler.ca
    November 7, 2012, 9:37 pm

    Thanks for discussing about today’s big problem and issue – Fresh Water Systems. I appreciate your work and this blog post. Great work, keep this carry on. I would like to visit again and like to read some more interesting information.

  7. Jay O'Keeffe
    South Africa
    November 7, 2012, 4:41 am

    Hi Brian, I really enjoyed your clear and lucid explanation (as usual) why water is unlikely to be traded globally. That I agree with, but it may not stop governments/companies from paying a lot to transport it long distances in special cases. I was in Mongolia in August, giving a course on environmental flows, because the previously little used North-flowing rivers (such as the Orkhon) are now likely to be diverted South to the Gobi to provide water for the escalating mining boom there. So this seems to be a case where companies are prepared to pay a very high premium to secure water, because they make the money back from the minerals. An interesting extra layer is that this commercial project my well be blocked by political considerations – North-flowing rivers such as the Selenge (of which the Orkhon is a tributary) flow into Russia, and eventually into Lake Baikal. So this may become another case in which environmental considerations may be (inadvertently) supported by trans-boundary political considerations.

    • Brian Richter
      November 7, 2012, 11:45 am

      Great to hear from you, Jay, and thanks for sharing that story from Mongolia. As you point out, there will be special cases in which a city or industry can afford to bring in water from great distance, particularly when no other local source is available. I’m very glad to hear that you’re helping to define how much water needs to be left in the exploited rivers for environmental flow purposes. I also hope that when these special cases arise, the buyers of the water will first consider all possible ways to reduce their demands (efficiency/conservation), or to offset their extractions by helping other local water users — especially farmers given the large volumes of water involved in farming — to conserve as much as possible.

  8. Jon Fisher
    Arlington, VA
    November 6, 2012, 4:35 pm

    Looking for an “easy win” to save more water? Eating a soy burger instead of a beef burger once per week can actually save more water than your total home water usage: http://bit.ly/Qlw7IH

  9. Greg Koch
    Atlanta
    November 6, 2012, 2:15 pm

    We, here at The Coca-Cola Company, have a non-export business model — with some 1,000 plants around the world — because water is heavy. When we signed the first bottler contract (Chattanooga, TN) it was to sell them syrup and let them bottle/distribute locally with water, carbonation, etc. We knew we couldn’t grow at scale by making every product in Atlanta and shipping abroad.

    • Brian Richter
      November 6, 2012, 2:41 pm

      Thank you, Greg, for that terrific illustration of the need to think of water from a “multi-local” rather than a global perspective. Our water challenges will almost always be local in nature, and they need to be addressed locally without assuming that we can fix them by moving water around. It’s terrific that many companies are now approaching their corporate water responsibilities from an company-wide (i.e., global) level, but as you know the ultimate solutions will need to be crafted in local watersheds and aquifers.

  10. Gary
    Arizona
    November 6, 2012, 1:18 pm

    Interesting and thought provoking blog.

  11. Amy
    November 6, 2012, 10:13 am

    Brian,
    Why was Nova seeking a permit to ship Great Lakes water to Asia if it is not profitable to ship water long distances? This seems to be a contradiction.

    • Brian Richter
      November 6, 2012, 10:51 am

      Amy, I’m absolutely certain that in the short term we’ll continue to see investors trying to make money by shipping fresh water (or icebergs, as suggested by the photo at the top of my blog). I suspect that some of those early ventures will make some profit. Others will never get beyond being a twinkle in the eyes of speculators. But in the whole and over the long term, those efforts simply don’t make economic sense for buyers. If governments or industries really want to access water in the most cost-effective manner, they will not look to water shipping or even long-distance water transfers over ground for the reasons I’ve detailed in the blog. To be frank, these water-shipping ventures are patently irresponsible and unsustainable because they result in sub-optimal (costly) water supply, ignore the huge potential of water conservation in demand management, and result in considerable environmental damage (i.e., local water depletion and excessive carbon emissions due to energy required to move water around). Smart investors will stay away.

  12. Michael
    Below the Mason-Dixon
    November 3, 2012, 4:37 pm

    Rahm Emanuel, as Chicago Mayor, is selling city services & utilities to Wall Street banks (He just sold “parking meter income” to Morgan-Stanley). It’s only a matter of time till folks such as he are selling our water utilities to those that want to add their percentage to water that they arleady add to other vital products we need for everyday life. THAT RUNS THE COST UP TO THE PEASANT…..what Wall Street calls “profits”.

    When that happens, water prices will skyrocket as these folks have shown no compassion, instead focus unswervingly toward profits for themselves.

    In the meantime, our local governments are encouraged to focus on creating more and more debt. When it finally gets to the “Greecian stage”, then Wall Street steps in and our public properties are “privatized” to reduce the debt.

    As a result…………it’s only a matter of time that water becomes another product such as corn, now used to make ethanol (a product that degrades or gasoline….yet profits Wall Street and it’s corporations). When that happens…..prices will undoubtedly skyrocket for more profits of those well removed from any local situations….and well removed from any compassion towards those affected. After all, these are the same folks that profit from our perpetual wars with Israel’s enemies….giving them incentive to continue America’s seemingly perpetual war machine.

    • Brian Richter
      November 4, 2012, 2:36 pm

      Michael, a little clarification is warranted here. When a city negotiates with a private service company to allow the company to assume responsibility for the city’s water or wastewater system, the city is not “selling” the water utility or the water itself – instead, the city is contracting with the private company to provide a service. That contract can be terminated by either party, as set by the contractual conditions. When this type of negotiation is taking place within your city, there are two issues that you should be particularly attentive to: (1) will water services continue to be made available to all that need it (or extended to those that don’t yet have it); and (2) will a reasonable price be charged for this service? Private investment or operation of water services can provide capital and expertise that may be badly needed to build new infrastructure or to rehabilitate worn-out infrastructure such as leaking pipes. However, the key question to ask is, “Will that capital and those services be provided in a manner that is as cost-effective and inclusive as if the public entity (i.e., city) was to provide them?”

  13. Peter
    Boulder, Colorado
    November 3, 2012, 1:06 pm

    Is water privatization really a “false bogeyman”? There are numerous efforts afoot by private entities to develop water infrastructure from pipelines to well fields to desal plants.

    The author states that, “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.” I certainly agree efficiency is the most cost effective method of stretching supply. But if efficiency is really the best way to make money, where is the massive investment in water efficiency from the private sector?

    It appears to me that capital markets view big infrastructure and new water supply as the road to riches. Dismissing fears of water privatization as a “false bogeymen” ignores the reality on the ground.

    • Brian Richter
      November 4, 2012, 2:06 pm

      Yes, Peter, there is a lot of private money going into water infrastructure these days. And it is true that considerable investment continues to go into “hard path” approaches such as building more reservoirs and pipelines and desalination plants instead of investment in water conservation measures. But private investors are slowly coming to understand that those traditional engineering approaches are becoming increasingly risky. I think this video interview of T. Boone Pickens is quite enlightening: http://www.pegasusnews.com/news/2012/aug/16/t-boone-pickens-why-i-got-out-water-business/ (he discusses why he got out of the water business in the first 13 minutes of the video)

      In my blog I pointed out some of the reasons why investing in hard path solutions incurs serious risk. Local opposition to ill-conceived water projects is growing rapidly. Another major source of risk for investors is climate uncertainty — will there be enough water to store in a reservoir or import from another basin in the future? But most importantly, I come back to the primary thesis of my blog — as local communities and their governments get smarter about cost effectiveness, they will come to realize that avoiding future needs (through conservation) is the cheapest and most reliable way of securing our water future. For the next couple of decades and in most river basins around the world, investing in conservation by far and away the smartest bet. Look for a paper in the Water Policy journal coming out later this month that I wrote with my students at the University of Virginia. In that paper we explain why water conservation is the best way forward for the four cities we studied; the same case can be made for thousands of other cities around the world.

  14. Jon
    Greeley CO
    November 2, 2012, 6:20 pm

    The author is absolutely right in stating costs of transportation will tend against a global water market. As they taught us in engineering school, water is wet, heavy, and hard to move. He is also correct in pointing out water issues are local issues. But the possibility of global capital buying up the local resource combined with the inability to obtain alternative supplies from the global market is exactly where the hysteria arises.
    We do not fear that Suez or Veolia will ship Colorado River water to Crete, but rather private equity’s quest for profit could well siphon income from the local economy with no compensatory benefits.
    And lest we forget, the only real way out of water scarcity is to have fewer babies.

    • Brian Richter
      November 4, 2012, 2:51 pm

      Jon, you raise a real possibility here: investors could potentially buy up the rights to use a local water source, such as the Edwards Aquifer example I referred to in my blog. That may force a potential new water user to either pay the price demanded by the investor, or go to another source for their water supply. There are two important things that limit the adverse consequences of this scenario, however. I mentioned the most important factor in my blog — when an investor tries to jack up the price of water, potential users are almost always able to reduce their use of water or find another suitable water source at a reasonable cost (this is exactly what the city of San Antonio has done). Therefore, there are real limits to how much an investor can make from speculating in water — there must always be a willing buyer! A second factor, common to many water rights systems such as those found in the western US, is that an investor can only hold onto a water right for so long without using it. Many states can force a water rights holder to forfeit their water right if it is not used within a certain amount of time, such as 5 years (this is the basis of the “use it or lose it” character of western water rights). That will limit the duration of time that a water speculator can hold onto a water right without selling it or putting it to use.

      Lastly, it’s very important to remember that individuals and corporations cannot own the water itself. They can only “own” the right to use the water. That right is granted by our governments. If that right is seriously abused, government can act to take the right away.

  15. Phyllis
    Denver CO
    November 2, 2012, 1:22 pm

    The author provides a high-level view of water issues. When one considers the underlying realities, however, the subject of privatization becomes more complex. First, water is too heavy to move, but the products of water get transferred around the world. Food moves from continent to continent–with receivers having to pay for local aridity and water shortages. Such movement reveals that water is not a local commodity and that for basic needs, consumers have to pay according to the markets.

    • Brian Richter
      November 4, 2012, 2:55 pm

      Phyllis, you raise a critically-important issue here. When water is in short supply, the price of goods that rely upon water in their production — such as food — can go up considerably. We’re seeing that play out with wheat and corn as many of the agricultural regions producing those crops are experiencing severe droughts. Many investors are now speculating in the price of agricultural commodities, and they are coming to realize that water shortages can affect the price of those commodities. While that is a very serious concern, it is quite different than speculating in the price of water itself– which was the subject of my blog.

  16. John
    Devon AB
    November 1, 2012, 2:51 pm

    Privatization of water in this Conservative Province is totally privatized already and we are waiting for the penalties of this.

    As it is now, and due to change again, the water is in the hands of the major cities who juggle the prices to suit their financial needs. It is indirect taxation.

    Edmonton now has the highest priced water in the world thanks to the City owned EPCOR!

    This is still not as bad as its going to get. The conservatives have a fully engineered project, The Weatherford project which was put up in 1982 and is designed to move 2/3rds of the might peace river south.

    This will be in private hands! It is the worst of all possible scenarios.