The Coming Age of Freshwater Scarcity

Parched Earth

By Hyungsub Moon, Staff Writer

Modern society in its current form cannot exist without oil.  As such, the oft-discussed possibility of dwindling oil supplies is considered a doomsday scenario for the global economy.  Markets rise and fall and fortunes are made and lost as the price of oil fluctuates.

It’s hard to believe that there was a time not too long ago when oil availability was a convenience and not a necessity.  Many decades later it creates a dichotomy for every modern society.  Excessive usage of crude oil is harmful to the environment, endangering the living standards of humanity.

Yet the current standard of living of entirely is dependent on the availability of relatively cheap oil.  While we are paying much attention to this crucial element, which could lead to ecological catastrophe, another key resource is dwindling and few are taking notice.  Now is the time to ask: can humanity survive without water?

The History

On a planet covered with water, it’s easy to have a complacent attitude.  In fact, through the water cycle, the total amount of water on Earth remains constant.  But under heavy pressure from population growth and industrialization, the availability of freshwater is on the decline.  In short, the natural process that produces freshwater cannot support the ever-increasing consumption by our civilization.

While the availability of oil is a modern concern, access to freshwater has been crucial to every human civilization.  Between 6000 and 4000 BCE, four of the world’s ancient civilizations emerged along nearby rivers.  The Tigris and Euphrates rivers in Iraq, the Indus River in Pakistan, the Nile in Egypt and the Yellow River in China provided access to one of the most essential elements to human life: freshwater.

Back in 2010, we are one step closer to ‘peak water’ with no clear solution to the growing scarcity of freshwater for Earth’s 6.8 billion (and counting) inhabitants.  If oil fuels the conveniences of the modern life, water fuels the essence of life itself.

While not blatantly obvious to some, it is arguably one of the most serious social and economic problems, one that requires urgent attention from politicians, industrialists, environmentalists, economists and even investment bankers.

Like the recent financial crisis of 2008-2009, the water crisis can be summarized as a problem of unchecked excess.  Just as the global recession was caused by excessive risk-taking in the financial industry, the water crisis has been caused by an excessive usage of freshwater, far beyond what natural processes can sustain in the long term.

Stresses

Regional population growth that is disproportional to the supply of regional water has created water ghettos where the average person has very poor access to clean, drinkable water.  For example, with explosive population growth and an extremely limited freshwater supply, drinking water is a costly necessity in many parts of Africa.  Meanwhile, Canada is blessed with massive supplies of freshwater that its small population could never reasonably exhaust.  With these massive worldwide inequalities, water should be viewed in social and economic terms.

Some Canadian policy groups believe that Canada is being targeted for freshwater exploitation.  Linda Diebel from the Toronto Star published an article in 2008 on a study by the Polaris Institute (a public policy group) and reported about how unfavorable terms in trade agreements under NAFTA have contributed to growing exploitation of Canadian freshwater to suit U.S. interests.  According to Diebel, the Canadian government agreed to clauses within NAFTA that require Canada to allow a defined level of water export regardless of a domestic shortage.  This certainly brings up political discussions on water as a political and economic commodity among nations.

It is easy to see that industrialized and developing countries all face a problem of freshwater management and without a doubt rapidly developing countries like China and India face not only the supply-side problem but also water pollution issues.

In fact, the water crisis works very much like a credit default swap with high leverage: the negative effects spread like water rings in a pond.  Since freshwater is heavily used in various industrial, commercial and agricultural production, the long-run equilibrium price level of ‘water-intensive’ products will rise.  Food is one of them.

Food Volatility

In 2009, The Economist recognized the pending water crisis in an article titled “A water warning.”  The article discussed a study by the Sri Lanka-based International Water Management Institute.  The study found that one third of the world’s population could be impacted by water scarcity by 2025.  The study’s author, Frank Rijsberman also detailed the specific challenges water scarcity will bring.  He argues that we could expect annual losses equivalent to the entire grain crops of India and the United States combined if the water consumption continues the current trend.

Since agriculture is an extremely water-intensive industry, representing 70% of freshwater use worldwide, the price level of agricultural products in the long run could become highly unstable.  Combined with increasing price levels for petroleum and raw materials, there is potential for cost-push inflations.  This further intensifies disparities of standards of living between the developed and developing countries, as rises in food price affects the poor more regressively than the rich.

Industry Concerns

Not only could the scarcity of freshwater influence the general equilibrium prices for water-intensive products, it could also increase volatility of stocks and bonds related to water-intensive industry in general.  The scarcity affects production costs (most likely to be variable costs), which in turn influence the earnings of a company.

The quality of stocks and bonds largely depend on the quality of earnings as the future cash flow determines both value and the credit worthiness of a company (in case of bonds, a volatility of cash flow can adversely affect interest coverage ratios).  Private water companies can potentially benefit from the expected scarcity.  Future investment appetite will likely reflect this change.  An example of such change would be WaterTech Capital, an investment bank that specializes in the water industry.

Balance

Solving this global conundrum is by no means simple.  There is an intense discussion on whether water should be priced according to its market value or—before even discussing the value of water—whether water should be treated as a free good or commodity.

The water crisis affects many nations in various ways.  Nations in Sub-Saharan Africa and South Asia do not have sufficient access to improved or sanitized water.  Canada worries that its rich reservoir of freshwater could be exploited through unfavorable terms of trade with its neighbor.  China is facing a problem of water pollution as a new government survey of China’s environmental problems has indicated increasing water pollution levels compared to 2007.

What’s even more pressing is that the water crisis is often overshadowed by politically popular issues like climate change or peak oil, resulting in relative lack of awareness.

There are some possible solutions to this water crisis, but the first step is increasing global awareness of the problem.  In short, we need to start a high-profile political dialogue on sustainable water management.  Second, on a more practical level, pricing water closer to its market value could allocate this scarce resource more efficiently.

A part of the problem with water is that we have so far thought of this valuable and essential resource as a free good.  As the article, A water warning (2009), by The Economist points out, water can be approximately priced from locally tradable water rights.

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However, there needs to be a clear distinction between the usage of water in industrial and commercial production and distribution for humans.  While the market might efficiently allocate water in industrial and commercial sense, it might also further exacerbate the disparity between the rich and the poor, as the market value does not account for social values of water as an essence of human life, as Dr Vandana Shiva, from the Research Foundation for Science, Technology & Natural Resource Policy, pointed out in the recent online debate held on The Economist website.

Investment in technologies that efficiently create freshwater must also be made to reduce costs associated with desalination process.  And with the proper cost structures, desalination can provide much needed supply of freshwater.

Each age in human civilization has been dependant on water.  It’s only relatively recently that we started to take it for granted. It’s time to take definitive actions to preserve one of the most essential elements for our lives before it’s too late.