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Page added on May 1, 2011

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Why Water Will Never Be the Next Oil

Consumption

If you want to glimpse what the future of water will look like, start with a cruise ship — where it is a carefully measured commodity. Every drop of water used on a cruise ship is either purchased at a dock or manufactured using on-board desalination systems fired by expensive fuel. Ships are closed loops — any water used has to be run through an on-board treatment plant (also using fuel), or piped to a dockside sewer system, all at the expense of the ship. A cruise ship has to pay for every gallon of water it uses, and then pay to get rid of it. This gives water an economic transparency it typically lacks on land.

One of the most noticeable uses of water is for the ice to chill the all-day, all-you-can-eat buffet, a classic feature of U.S. cruise ships. In 2008, the executive chef for Celebrity Cruises (Royal Caribbean’s high-end line) had an idea: Why not substitute smooth, black river rocks for the ice on the all-day buffet?

He was thinking mostly in aesthetic terms: piles of sleek black river rock would look so much more chic than melting ice. A test of the idea on a single ship was a hit: not only did guests love it, but the rock turned out to hold cold longer than ice.

Today, all nine of Celebrity’s mega-ships use black river rocks in their buffets, saving each ship about 6,300 gallons of water a week, not to mention the energy costs of treating and disposing of the melted ice water. Celebrity says it hasn’t done a cost-savings analysis of the swap — unplugging an ice machine that had been running 24 hours a day was persuasive enough. But that water, from that one small change, is the equivalent of what three U.S. families use in a year.

This seemingly simple innovation is exactly the kind of “smart water” thinking that the coming decades will require as competition for water grows more intense. The world of water, and water providers, aren’t well-positioned for that competition. If you leave aside the somewhat silly world of bottled water, there has been almost no innovation in the industry of water for decades. A water facility today uses the exact same technology it did in 1973. In what other industry is that the case? The typical Wal-Mart long-haul truck has more intelligence in it than the typical water system.

The technological revolution has completely bypassed the world of water, mostly because of the strange nature of the market for it. Water has almost no pricing signals. You can’t trade it. And while in the developed world you don’t typically run out, if serious scarcity develops, you can’t just buy more, no matter how much you’re willing to pay. The most liquid and plentiful natural resource on the planet is almost completely illiquid as an asset.

Consider some of the most-traded commodities on Earth: corn, wheat, coffee, orange juice, timber. Now think about how much they all depend on water. In fact, their prices often move inversely to how much water is available. There’s even a market for weather futures— cooling, heating, snowfall, rainfall. And yet, you can’t trade the most important commodity in the world, and you probably never will beyond a very limited local arena. Water is different from soybeans or light sweet crude. It’s cheap, like soybeans, but it’s heavy, like oil.

For a commodity to be traded, you have to be able to move and store the physical asset with relative ease. But water is so cheap and so heavy that we’ve never developed the systems for moving it across geographic regions.

The result is, if Orlando is flush with water, and Atlanta is having a drought, there’s simply no way to transport city-sized quantities of water the 400 miles between the two cities — even if Atlanta were willing to pay a premium of 200 percent.

In reporting my book, I frequently came across the sentiment: “Water is the next oil.” (The phrase calls up half-a-million Google hits.) In many ways, it would be great if water were the next oil. For all its ugly imperfections, the oil market works well. It’s deep, efficient and one of the most liquid commodity markets on the planet.

For a water market to work, we’d have to develop a transparent pricing system, which means that at the lowest incomes, people would be in danger of being “priced out,” something we’d obviously have to prevent. We don’t want a world in which people can’t access clean water simply because they’re unable to pay for it. Which  of course, is exactly what we have today: one out of 6 people lack access to clean drinking water— even though it’s “free.”

It’s quite possible that water markets could develop in local watersheds — the Georgia-Florida-Alabama water war that has lasted 25 years would be much easier to sort out if there were a real operating water market along the Chattahoochee and Apalachicola Rivers. Just like there is in Australia’s vast Murray-Darling river basin. In that basic water market, farmers can decide to sell their water to drought-stricken cities.

One huge impediment to water trading in the U.S. is the murkiness over ownership. To sell something, you have to own it (or at least the right to it). Water rights in the U.S. are a mishmash of state and federal law, court rulings, and tradition. In some parts of the western U.S., you don’t even technically own the rain that falls on the roof of your home.

Markets and pricing notwithstanding, one of the encouraging things I found as I traveled the world to write about the future of water is that there is a blossoming of innovation taking place around water, from Perth to Delhi to Las Vegas. And it’s being driven by exactly the same forces that led to river rocks in the buffets of Celebrity Cruise ships: scarcity and cost.

Nothing inspires efficiency like scarcity. And while water itself is typically free (we pay only for the cost to deliver it, whether in the bathtub or an irrigation canal), the costs to move it, heat it, clean it, and dispose of it are all rising. So even without a market, that’s the kind of pressure that will inspire a burst of innovation in water in the next decade— in how we think about it, how we use it, and even how we price it.

Freakonomics



3 Comments on "Why Water Will Never Be the Next Oil"

  1. Rick on Sun, 1st May 2011 7:28 am 

    Fresh water is a finite resource. This article is pure BS. Peak water is just like Peak Oil.

  2. DC on Sun, 1st May 2011 1:01 pm 

    If water will never be the next oil, then why are some of americas very corrupt corporations ie bechtel, along with some European ones, pressureing 3rd world governments to privitize water systems? There is nothing espeically inovative about there business model. Take over the water system, raise the prices, make huge profits…on water. Dont think they wouldnt jump at the chance to do in North America or Europe either. Only a matter of time before they do.

  3. Lionel Pengilley on Fri, 8th Jul 2016 9:33 am 

    That said, real time prices are hard to come by. If irrigators are just looking at the approvals, then their price information is out of date. That’s why I’ve set up the water broker price comparison here: https://www.wbw.net.au/temporary-allocation-water-price-aggregator/

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