Rickards: Water, water, everywhere

by Jim Rickards, Darien Times

“Day after day, day after day,

We stuck, nor breath nor motion;

As idle as a painted ship

Upon a painted ocean.

Water, water, every where,

And all the boards did shrink;

Water, water, every where,

Nor any drop to drink.”

 The Rime of the Ancient Mariner, Samuel Taylor Coleridge, 1798

The passage from Coleridge’s classic poem quoted above illustrates the irony of water supply and demand. Water is ubiquitous, yet often scarce where we need it the most.

We all learn in school that 70 percent of the earth’s surface is covered in water. Even that simple fact does not reveal the full extent of the water available because the surface statistic hides the fact that water runs to great depths; sometimes miles deep. The sheer volume of water on the earth is hard to comprehend, but it is far greater than the mass of land including the high plateaus and mountain ranges. Water really is everywhere.

Not only is water everywhere, it doesn’t go anywhere. Water can be consumed and channeled and it evaporates. But, eventually the water makes its way back into vast pools either by runoff or rain. Water changes from liquid to gas or ice and moves continually, but it does not go to Mars. It stays here on Earth.

Yet, not a day goes by without a new story on water scarcity from the recurring droughts in Texas and California to acute shortages in major cities like Sao Paolo and Cairo. Water wars between upstream and downstream states have already broken out in places like Sudan, India and Pakistan. More conflicts of this type are on the horizon in Turkey, Iraq, Thailand and Vietnam.

How can we unlock this conundrum between plentiful water supplies and water scarcity at the same time?

Most water is salty or brackish, which makes it undrinkable for humans. Even fresh water can be polluted and dangerous to drink without treatment. Above all water is in the wrong places. There is enough water in The Great Lakes to flood the drought-stricken state of California to a considerable depth, but there is no practical way to move the water from Michigan to California. All of these problems – salt, pollution and distance – point to infrastructure solutions of various kinds.

Salt water can be converted to fresh water through the use of massive desalination plants. These plants are not a perfect solution. They remove salt but other elements including trace metals such as copper and magnesium are left behind in unhealthy quantities. The salt that is removed from the water is returned to the source thereby increasing its salinity, which can be harmful to aquatic life. Finally, the desalination process is massively energy intensive so the plants are expensive to run and have a large carbon footprint. But the technology does produce fresh water for industrial use, irrigation and watering golf courses in places like Dubai.

Pollution can be removed with the right infrastructure. Some new plants even treat raw sewage to the point where safe drinking water can be produced. Most of us probably still prefer a chilled bottle of Evian to the output from a sewage plant, but it’s nice to know the technology exists.

The greatest infrastructure challenge is moving water from point A to point B. This is partly because water is so heavy, much heavier by volume than oil and other wet commodities that are transported around the world. The quantity of water that would fit under a small dining room table weighs well over a ton.

The oil industry has had over 155 years, since the first commercially successful oil well was drilled in Titusville, Pennsylvania in 1859, to create the infrastructure of wells, pipeline, vessels, refineries and trucks that get oil from distant jungles and deserts to your gas tank. Nothing comparable exists in the world of water, although many of the logistical challenges are similar.

The impediments to solving these infrastructure challenges are mainly political. Water is often coveted at the source. Political jurisdictions that have dense networks of lakes, aquifers or upstream rivers are reluctant to share the water with distant or downstream jurisdictions and do so only under legislative or treaty arrangements that put strict quotas on how much water can be allocated to each participant in the arrangement.

Even worse, politicians cannot resist the urge to subsidize the price of water for their local constituents. Low prices are maintained by local politicians even though more distant locations might be willing to pay much higher prices for the water. This results in water waste in the source jurisdiction and scarcity in the more distant jurisdiction. Market forces that would tend to distribute water to the highest bidder and best use are squashed with the result that water is wasted by those paying too low a price.

The problems of political interference in water pricing don’t end with waste. Nontransparent pricing also stands in the way of infrastructure finance. Lenders cannot be expected to provide the billions of dollars needed for major pumping and pipeline systems if a market price for water cannot be assured.

Subsidized water pricing also works against access to supplies in other ways. Subsidies at the source prevent water from leaving a particular jurisdiction.

When fresh water is available at a free market price at the source, it cannot profitably be shipped if water is subsidized in the target market.

For example, fresh water can be freely owned and sold from sources in Chile, Iceland, and few other countries around the world. In principle, this water could be pumped onto clean-hulled supertankers and transported to locations such as Shanghai and Dubai that desperately need imported, clean water for drinking. The problem is that Shanghai and Dubai both subsidize fresh water by selling energy to local desalination plants at below-market prices. As a result, Chilean or Icelandic water cannot be sold profitably in those markets once the costs of transport are taken into account. If the subsidies in Shanghai and Dubai were removed, then the foreign imported water would be competitively priced.

This raises the question, what is the world price of water? Water is one of the simplest and most homogenous commodities. Water is just H20, a very simple molecule, much simpler than oil or certain mineral ores that trade as commodities. But, there is no global price for water. Water does not trade like a global commodity. Water pricing is local, political, regulated, opaque, and inefficient. The simplest commodity in the world has the most Byzantine pricing. This opaque pricing stands in the way of the technology, infrastructure and transportation solutions that hold the key to eliminating water shortages once and for all.

Fortunately this untenable state of affairs is rapidly changing as it must if the world is to avoid water riots and water wars sure to emerge from the droughts and shortages that are already here. Demand for water is inelastic as to price; people need water to live and will pay any price to get it. Water is super-abundant for all practical purposes. The only thing standing between inelastic demand and unlimited supply is infrastructure.

This puts water utilities in the enviable position of being able to intermediate expanding demand and new sources of supply. Utilities serve the same function with regard to water as banks do with money. Just as banks obtain money from depositors and provide it as loans for borrowers; utilities obtain water from deposits in rivers, lakes and aquifers provide it to needy users.

Water supply is closely linked to money flows because finance is the key to large water infrastructure projects. Water supply is also closely linked to energy because most large water infrastructure projects are energy intensive either as to inputs, such as desalination, or outputs, such as hydroelectric facilities. This Water+Energy+Money nexus is the most important emergent property in today’s complex dynamic world.

Carefully selected water utilities, water infrastructure firms, and water finance specialists may have the most to gain in this thirsty world.

James Rickards is the editor of Strategic Intelligence, a monthly newsletter, and Chief Global Strategist at West Shore Funds.

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