Why water will become the world’s most important asset

“Water will eventually become the single most important physical commodity-based asset class, dwarfing oil, copper, agricultural commodities and precious metals”.

“Water will eventually become the single most important physical commodity-based asset class, dwarfing oil, copper, agricultural commodities and precious metals”.

That was economist and ex-Bank of England MPC member Willem Buiter more than six years ago. You could say he was a bit early in his forecast. While water is vital for life, it hasn’t so far become the planet’s most-wanted asset.

But as I examine today, this could be only a matter of time…

Tewkesbury’s taps turn off

Let’s start at home. The UK receives less rainfall per person than our northern European neighbours. The South East of England is the most water-stressed part of the country, with London actually drier than Istanbul (believe it or not!)

Meanwhile, our national demand for water is high and rising. Every Brit uses about 150 litres of water a day, up 1% each year since 1930, according to Waterwise. Yet we’ve always taken it for granted that when we turn on the taps, water will flow.

But imagine if our supplies soured – or even dried up completely.

Impossible? Just ask the 10,000 citizens of Tewkesbury. Last weekend they were without water for more than 48 hours after a supply pipe burst.

It boils down to this; a global water shortage is looming. And increased investment is sorely needed to ensure continued adequate global supply…

Water, water, everywhere and not a
drop to drink…

We’re always hearing about wealth inequality, but worldwide water inequality is just as severe. OK, 70% of the earth’s surface is covered by water. But some 97.5% of this is non-potable seawater, i.e. it’s salty and unfit for human consumption.

Desalination – removing the salt – is both complex and costly. Of the potable percentage, a large chunk is locked up in polar ice caps and glaciers. Only 0.5% of the planet’s total water resources are available for freshwater uses, says Water for the World.

Fewer than 10 countries possess 60% of this.

Worse, natural groundwater reserves are running out. Some 30% of the planet’s potable water lies in deep underground aquifers (gravel and sand-filled reservoirs that took nature many millennia to create). It’s extracted for agricultural, private and industrial uses, often at highly unsustainable rates.

21 out of 37 of the world’s major aquifers, ranging from India and China to the US and France, are receding as their water is used faster than it’s replenished.

India is the world’s largest consumer of groundwater. It uses an estimated 230 cubic kilometres of the stuff every year – over a quarter of the global total. But 54% of India’s groundwater wells are shrinking.

At current rates, in 20 years about 60% of all India’s aquifers will be in a critical condition.

60% of European cities with more than 100,000 people have used groundwater much faster than it can be replenished, says Water for the World. Indeed, “the water table is dropping all over the world”, says senior NASA water scientist Jay Famiglietti. “There’s not an infinite supply of water.” 

Pollution is a growing worldwide worry. In China, most river water in the country’s major cities is ‘unfit for human contact,’ according to official government data.

And there’s another major concern: The sector’s infrastructure is dire. Global pipes, cleaning plants and sewer systems are in disrepair with the US losing 6bn gallons of treated water a day just from leaky pipes. Rectification costs have deterred the level of infrastructure spending that’s needed. Indeed, obsolete distribution systems waste more than 40% of the total global water supply, says Water for the World.

Water demand will surge

In contrast, demand for water is set to surge.

Since 1940 the global population has doubled, but overall water use has quadrupled. 1.8bn people have no fresh water access and 2.5bn people need better sanitation.

As economists Daniel Grossman of West Virginia University and David Slusky of Kansas University commented in a recent study, “failure to provide safe drinking water has large health implications”. 

Assuming no horrendous natural disasters or the advent of WWIII, the planet’s population is set to rise much more.

Just over 7.5bn people presently live on the planet. Estimates vary, but UN predictions of the human population reaching 8.6bn in 2030, 9.8bn in 2050 and 11.2bn by 2100 are widely accepted as plausible.

Rising living standards translate into more water-intensive accommodation. And richer consumers eat more meat, whose production also requires more water.

More people are moving to mega cities that are growing faster than ever before, in emerging economies in particular. 54% of today’s world population lives in urban areas and that’s expected to grow to two-thirds by 2050, according to a 2014 UN report.

Right now, agriculture accounts for 70% of global freshwater use. If the world population rises in line with UN forecasts, food production will need to grow by almost 70% by 2035 to provide enough sustenance.

In summary: global water demand has been forecast by the OECD to grow by 55% between 2000 and 2050.

It’s all about the price

The problem is, in fact, the solution. The price we place on water is just plain wrong.

“Globally, water is seriously undervalued”, says Leah Schleifer at the World Resources Institute. “Its price does not reflect the true, total cost of service from transport via infrastructure treatment and disposal. This has led to…lack of investment in infrastructure and new water technologies that use water more efficiently. When the price of receiving clean water is closer to its actual service cost, efficient water use will be incentivised.”

So, to reflect its future scarcity, the price of fresh water must rise. Australia, the world’s most developed water market, led the way in introducing tradable ‘water rights’ to allocate resources more efficiently. Other countries such as Chile, South Africa and the US have followed suit.

Rising prices would also encourage countries with the most surplus water to maximise their resources, eventually benefiting water-poor nations.

Producing more potable water or of preserving existing supplies via recycling and conservation would become a large and fast-growing international business. As part of this process, the world needs a proper fresh water market.

Willem Buiter has also forecast a massive increase in investment in the sector, including the construction of more storage, shipping and transportation facilities.

So, the question now is: what’s the best way to prepare and invest in water?

Over at Strategic Intelligence we’ve got some ideas for you.

To find out more about us, click here.

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