Ebb without Flow: Water May Be the New Oil in a Thirsty Global EconomyPublished: October 01, 2008 in Knowledge@Wharton
Is water the new oil? The answer is yes, according to a number of economists, business leaders, scientists and geopolitical strategists, who argue that it's time to stop taking for granted the substance that covers 70% of the planet and makes up a similar proportion of the human body. Just as the late 20th century saw an oil shock, the early 21st century may feature a water shock, where scarcity leads to a sharp price hike on a resource that has always been plentiful and cheap. Such a scenario could have an even bigger impact than peak oil, transforming markets, governments and ecosystems alike.
The basic story: 97% of the world's water is salty. Human use of the remaining 3% has boomed, the result of industrialization and the need to produce more food to feed a growing, wealthier population.
In 1900, global water consumption totaled approximately 770 cubic kilometers, according to a 2007 report by Zurich-based consultancy Sustainable Asset Management. Today, the figure is 3,840 cubic kilometers. It is projected to grow to over 5,000 by 2025. That's well under the 9,000-12,000 cubic kilometers of annual rainfall that winds up in places humans can access. But pollution, waste and inefficient delivery take a big bite out of that figure, as does climate change, with its attendant droughts and early snowmelts. The consequences, including water rationing in California and the occasional drying up of portions of the Yellow River in China, are increasingly visible. By 2030, estimates the Organization for Economic Cooperation and Development, more than half the human population will live in areas where the water supply is stressed.
A Catastrophe Ignored?
Thus far, the issue -- and its impact on economies, populations and businesses -- has drawn little attention. A 2007 survey sponsored by the Marsh Center for Risk Insights reported that while 40% of Fortune 1000 companies believed the impact of a water shortage would be severe to catastrophic, only 17% said they had prepared for such an eventuality. "A lot of companies haven't begun to think of this as a major issue," says Howard Kunreuther, co-director of Wharton's Risk Management and Decision Processes Center and a former advisor to the Marsh Center. The same goes for the general public, he adds: People have always tended to consider water "a free good. It pours out of your sink, you take long showers, you get a bill every three months and you pay it and don't think about it."
That may be changing. This fall, water scarcity gets its own version of An Inconvenient Truth with the nationwide release of the endangered-water documentary Flow, which Wired magazine dubbed "the scariest movie at the Sundance Film Festival." Are we doomed to a thirsty future? Not necessarily. But plain old water is fast on its way to becoming "blue gold," a commodity to be sought out, fought over, trundled from country to country and possibly sold to the highest bidder -- a situation that represents a threat and an opportunity all at once.
"This is a massive challenge," says Wharton management professor Witold Henisz, who sits on a panel looking into global risks for the World Economic Forum. He expects water to be a major theme at the Forum's annual gathering next year in Davos, Switzerland. "I don't think you can point to any one thing and say that this is the end of the world as we know it. [But] there will be big spikes in the price of water. There will be some rivalries between countries over access to water. And the incentives to come up with solutions will [increase]."
For most of the global population, water scarcity is first and foremost a humanitarian crisis. According to the World Water Council, 1.1 billion people worldwide lack adequate drinking water -- one-sixth of humanity. Some 2.6 billion lack adequate sanitation. Poor water quality is the major cause of the diarrheal diseases that kill millions annually. A United Nations study reported that 1.6 million lives could be saved each year by providing clean drinking water and sanitation. Such problems, of course, have long been linked to the poor infrastructure of underdeveloped nations. But with the global population forecast to be nine billion mostly urban people by 2050, the idea of water as being a costly substance in and of itself further compounds these challenges.
"The issue is still quality perhaps much more so than quantity," says Wharton management professor Marshall Meyer, who has studied China's water-scarcity troubles. China is engaged in major infrastructure efforts to carry water to large cities, but pollution remains a problem.
Still, direct human consumption represents a drop in the aquifer compared to other uses. Just 10% of the globe's fresh water goes into ordinary people's drinking glasses, showers or cleaning buckets. Twice that amount is devoted to industrial use, while 70% -- higher in many developing countries -- is taken up by the agriculture sector. Some 18% of agricultural land is currently under irrigation. Water: A Crisis of Governance, the UN's second report on global water supply, predicts that number will grow as the market responds to a projected 55% increase in food demand. Increased wealth, in turn, will mean that a larger portion of the food people want is likely to be meat, which is vastly more water-intensive than vegetables. Scarcity-induced water price hikes would mean significant adjustments both for farmers and their customers.
One way to measure how water prices would affect agricultural or industrial markets is via the emerging concept of "virtual water," says Joel Cohen, a professor of population at Rockefeller and Columbia Universities who wrote the acclaimed 1995 book, How Many People Can the Earth Support? For instance, it takes 13,000 liters of water to raise one kilogram of beef. A similar amount of wheat requires 1,300, and a like quantity of potatoes takes just 100 liters. Industrial uses can be calculated as well: A kilogram of computer equipment, Cohen says, uses the same amount of water as the wheat. A map of world trade that includes the virtual water contents of the goods that are bought and sold demonstrates the potential impact of water prices on a global economy.
"The concept of virtual water is to attribute to each item that is traded the water that it took to produce that item," Cohen says. "It indicates where the water's coming from and where it's being sold.... And there are water importing and exporting countries and it somewhat changes the image of trade in commodities because it shows who's giving up water resources -- the U.S. and Canada -- and who's getting the resources, notably China, by this virtual water route."
For a global water industry whose worth is estimated at between $400 billion and $500 billion, the threats to the traditional way of delivering water also represent an opportunity. In the Texas panhandle, the oilman T. Boone Pickens first became acquainted with the vast Ogallala aquifer -- which stretches from Texas to the Dakotas and supplies the lavish amounts of water that irrigate much of American agriculture -- when he bought a ranch atop its southern edge in 1971. Over the past decade, his attention pricked by news stories about a tightening in the water supply, Pickens began buying up acre after acre of subterranean water rights across the panhandle. Today, he owns more water than any other individual in the country. His plan: Build a pipeline across the state in order to sell the water to the city of Dallas.
Once a fearsome corporate raider, Pickens has softened his image a bit in recent years, declaring the age of fossil fuels dead and starring in a series of television advertisements for alternative energy sources. But when discussing the pipeline initiative, he says an essential substance like water should be treated no differently than any other commodity in the market. "There are people who will buy the water when they need it. And the people who have the water want to sell it. That's the blood, guts and feathers of the thing," he told Businessweek in June. Interviewed in the documentary Flow, he smiled and said: "People say, 'Water's a lot like air. You shouldn't charge for water.' Well, okay. Watch what happens."
That sort of logic has sparked a backlash elsewhere, with activists -- and many governments -- insisting that water is a basic right, not something to be treated as property. "To deny the right to water is to deny the right to life," writes Maude Barlow in the introduction to her Blue Covenant, the basic text of what's been called the "Water Justice" movement.
In wealthy and developing countries alike, private water supply concerns have run into public and political troubles. In Bolivia, price hikes after the privatization of the water system in the city of Cochabamba led to riots in 2000 and the eventual ejection from the country of Bechtel, the engineering firm running the system. In subsequent years, governments nixed water-privatization schemes in nations from Tanzania to Holland. "Water cannot be turned over to private business," Bolivian President Evo Morales said while celebrating the departure of the multinational water concern Suez, 10 years into what had initially been a 30-year contract to run the water supply for his nation's capital. "It must remain a basic service, with participation of the state so that water service can be provided almost for free."
"People are used to the price of food going up when food is scarce," says Wharton's Henisz. "I don't see a lot of willingness to pay more for water. I don't think there's a willingness to look at a market solution [in] a large part of the population. I think people would rather overthrow their government than pay for water. Morales is president because he led the opposition to water privatization in Cochabamba." Instead of a simple market solution, Henisz says, problems of water scarcity will require cooperation among governments, businesses and NGOs.
And not only in the third world. In the United States, just 16% of residents use water supplied by private companies. Others -- including the citizens of Dallas, despite Pickens' efforts to the contrary -- get their water from municipal utilities, most of whom base the price simply on the cost of transmitting it to residents. For agricultural users, who gulp down the bounty of the Ogallala as they produce abundant food for a prosperous nation, Cohen says, the low price amounts to an unacknowledged subsidy.
As with Energy, Conservation Helps
Just as with oil, the impact of water scarcity can be alleviated through an array of conservation and efficiency measures. Among the proposals -- steps to improve rain-fed agriculture, to discourage the plowing that leaves soil thirstier, to develop hardier plants that can withstand longer dry spells, to replace wasteful "flood" irrigation systems with more efficient "drip" systems, to upgrade aging infrastructure that wastes oceans of water a year, and to encourage individual conservation. In the Norwegian capital of Oslo, for instance, officials have embraced "vacuum-flush" toilets that vastly reduce the amount of water used. On the supply side, there are also plans to tap new sources of water by investing in better desalination technology.
That technology has vastly improved over the past three decades, using a technique called reverse-osmosis, in which sea water is forced through a membrane that extracts its salt. Long crucial to parched Middle Eastern countries like Saudi Arabia --whose abundant oil enabled the operation of the energy-hogging facilities --desalination plants have been less successful elsewhere. That could change, though, thanks to improvements in membrane technology and energy efficiency that have slashed the costs of desalination: At a new $300 million facility north of San Diego that won regulatory approval last year, officials told the Wall Street Journal that they expect the energy costs of producing 1,000 gallons of fresh water to be $1.10. At a mothballed plant up the coast in Santa Barbara, the cost for the same amount had been $2.10.
Those economics help explain why the nation's desalination capacity grew by 40% between 2000 and 2005, according to an National Academy of Sciences report published in April. Of course, the five million gallons a day the United States is able to desalinate remains a tiny .01% of total use. (Globally, capacity is 10 billion gallons a day; Saudi Arabia and the United Arab Emirates, who can each desalinate more than six million gallons, have the largest national capacities). The study recommends that the federal government, which has left much of the research funding to the private sector, become more active in studying ways to expand desalination -- and mitigate its potential environmental side effects. Still, it concludes that "conservation and water transfers will usually be less costly than desalination, and conservation of water often comes with associated benefits, such as reduced energy costs."
According to some economists, one thing that would hasten the development of a less wasteful water system is the very object of water-justice ire: privatization. At present, the low price of water -- especially in the first-world countries where most technological research takes place -- leaves people with little economic incentive to invest in more water-efficient forms of farming, industry or even toilet technology. Just as $100-a-barrel oil sent customers racing to buy hybrid cars, so might costly water encourage agribusinesses to ditch their water-wasting irrigation systems in favor of frugal new technologies. Alternatively, the water costs of feeding a bull, passed on to customers in the form of expensive beef prices, might encourage a diet dominated by less thirsty forms of protein. Either way, the result would be to trim the 150 gallons per capita of water that Americans consume daily.
University of California economist David Zetland has written that the country actually does a better job of managing its mostly foreign oil than it does with its newly threatened water. "Why such a contrast? Because oil is bought, sold and marketed as a commodity," he wrote in a New York Times blog. "Water, in contrast, is treated as a 'human right' that should not be allocated by price. Because scarcer oil costs more, quantity demand falls to equal supply. Because scarcer water does not cost more, demand exceeds supply and rationing, misallocation and hardship result." Pickens, for his part, is confident that buyers will come around. His pipeline goes almost to Dallas, and he assumes parched residents will eventually want to drink from it -- for a price.
The Font of Wealth
The new awareness about water scarcity, in some ways, represents a return to an awareness that has dominated much of human history. Water has always been linked to economic development, political maneuvering and the threat of violence, even in ostensibly stable places far from the desert and the agricultural economy. In the early days of American independence, New York and Philadelphia battled to be the new nation's dominant city. One reason New York emerged victorious: It purchased the rights to much of the water between the city and Canada, bringing it into town via an elaborate system of aqueducts, and rendering the city a safer, cheaper and more hygienic place than its erstwhile competitor.
Later, as the American population spread into the parched far west, the politics of water created and lost fortunes. Modern Los Angeles was made possible in large part by the 1913 opening of a 233-mile aqueduct that brought water from the Owens Valley in the Sierra Nevada Mountains; one of the city's most famous streets, Mulholland Drive, was ultimately named for the engineer of the project. The graft-ridden manner in which the water rights were acquired led to violent clashes with Owens Valley farmers that became known as the California Water Wars. And the seedy way the pipeline route was decided -- it was steered toward once valueless land that had been quietly purchased by well-connected insiders -- formed the backdrop for the 1974 film Chinatown. (It wasn't until the 1990 sequel, The Two Jakes, that audiences saw similarly underhanded battles over a newer commodity: oil.)
But the sale of water, like that of oil, is much simpler in a domestic marketplace than in a global economy. Unlike t-shirts or soft drinks, water is the sort of resource for which countries do not like to depend on others A significant part of China's determination to hold onto Tibet, some argue, is that the sparsely populated region is rich in the water so desperately needed in China proper. Tensions over water supply have cropped up as irritants between neighbors around the world. "In Latin America, Africa and the Middle East, the potential for rivalry is very large," says Henisz. "We've been in an era of relative peace in terms of resource plays between countries for some time. That could be ending."
This is true even among traditional allies: A majority of members of the Canadian parliament last year voted to ask that water be exempted from the free-trade provisions of NAFTA. Against such a backdrop, governments have a significant -- and altogether hard-headed -- interest in making sure their water supply is used efficiently.