WORLD WATER
Long-Run Prospects “I expect to see in the near future a massive expansion of investment
in the water sector, including the production of fresh, clean water from other sources (desalination, purification), storage, shipping and transportation of water. I expect to see pipeline networks that will exceed the capacity of those for oil and gas today.
“I see fleets of water tankers (single-hulled!) and storage facilities
that will dwarf those we currently have for oil, natural gas and LNG. I see new canal systems dug for water transportation, similar in ambition and scale to those currently in progress in China, linking the Yangtze River in the South to the Yellow River in the arid north.
“I also hope and expect that these new canal ventures will be designed
and implemented with a greater awareness of the environmental and social impact of such mega-projects. India will have to engage in investment on a scale comparable to that seen today in China to produce clean water in the best locations and transport it to where the household, industrial and agricultural users are.”
Water as an Asset Class “I expect to see a globally integrated market for fresh water within
25 to 30 years. Once the spot markets for water are integrated, futures markets and other derivative water-based financial instruments – puts, calls, swaps – both exchange-traded and OTC will follow. There will be different grades and types of fresh water, just the way we have light sweet and heavy sour crude oil today. Water as an asset class will, in my view, become eventually the single most important physical- commodity based asset class, dwarfing oil, copper, agricultural commodities and precious metals.”
Water as Seen by an Economist — An essay by Willem H. Buiter, Global Chief Economist. He outlines why water will eventually become the single most important physical commodity asset class.
regulation ensures investment risks can be passed straight to customers. Providing water services is
attractive for precisely the same reason as power and gas transmission and distribution companies and private-finance initiative hospitals, roads and other infrastructure. The regulator guarantees a minimum return, and there is the chance to earn even more if the provider can outsmart the regulator.
A Good But Not An Asset Buiter explains why water is a
private good that can be provided by the market – rather than a public good that must be provided (or at least paid for) by the state. He makes a convincing case that property rights can be defined and enforced in water. It is a rival product (use by one person precludes use by another) and an excludable one (the owner of the property rights can prevent
84 September 2011
unauthorised use by another person). He also disposes of the argument that water is some kind of moral right or merit good that should be provided free to all. Buiter is also on firm ground when he
complains about the inefficient use of water supplies in many parts of the world because of poor pricing systems. It makes no sense to have golf courses and immaculate green lawns in the deserts of the south-western United States or un-metered supplies and water rates across much of the United Kingdom. But proving water is a private good that is
often mispriced is not the same as making the case for treating water as a global commodity and an asset.
Trading Energy Not Water Let’s leave aside the obvious objection
that consumption goods like oil, gas, copper and grains are not really capital assets like equities and bonds because they do not provide a stream of expected future income, and commodities are therefore not really an asset class in the usual sense of the word. Water simply does not meet the requirements
for a global commodity market to emerge. The key constraint is the prodigious amount of energy needed to desalinate sea water and move water over long distance by pipeline or tanker. Unlike gas, water can’t be liquefied or
compressed to improve the value-to-volume economics. At a global scale, water is really an embedded form of energy
(an ‘energy vector’) as some commentators have explained. The commodity is not the water but the energy. For a country like Saudi Arabia, with abundant fossil energy
and more importantly huge solar resources, the availability of clean drinkable water will never be a constraint since desalination is an option. For China’s Xinjiang province, water will always be an issue because it is so far from the sea despite plentiful solar and wind resources.
At a global scale, water is really an embedded form of energy
There will always be local water shortages. The south western
United States and Central Asia are prime examples. But it is very unlikely that a global water market will emerge to relieve them. Investors should stick to boring old water services and
infrastructure companies and leave dreams of water markets for pioneers with a lot of money to lose. •
John Kemp, Reuters market analyst.
He is a regular contributor to Commodities Now and Commodities Now online. The views expressed here are his own.
www.reuters.com
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