Ed Dolan's Econ Blog

Is Wall Street’s Thirst for Water Really a Dire Threat? Nonsense, Says David Zetland

Journalist Frederick Kaufman made a few waves last week with an article on water markets in Nature and a related interview in Wired. His cautionary story envisions a global water derivatives market that would allow speculators to rake in billions while poor farmers, priced out of the market, would be unable to irrigate their crops. Some typical passages:

Making money come out of the tap means that fresh water must be given a price anywhere it is traded—a global price that can be arbitraged across the continents. Those in Mumbai or midtown Manhattan who understand the increasing value of water in the world economy will speculate on this undervalued ‘asset’, and their investments will drive up the cost everywhere (Nature)

The implications are dire: the destruction of aquatic ecosystems, the extinction of innumerable species and the risk of regional and international conflicts—the much-dreaded  ‘water wars’  of the twenty-first century. What will Egypt do when Ethiopia dams the Blue Nile? What will happen when Yemen becomes the first country to run out of water? The short answer: nothing good. (Nature)

Once there’s global arbitrage for the price of water, it could be terribly destructive, just like we saw with food, but more so. You have a $648 trillion global business in derivatives. It’s a monster. Do we want water to join that? We saw what derivatives did for mortgage-backed securities. We don’t want them doing that for water. (Wired)

Does any of this make sense? Not much, says water economist David Zetland. He explains how little foundation there is for Kaufman’s dire vision in comments on both Nature and Wired and in a recent post of his own. Zetland makes several telling points.

To begin with, the first requirement for a global futures market is that a commodity be fungible. According to Kaufman, it is: “The commodity pumped from one lake or river or stream is pretty much the same as that collected from an iceberg, extracted from an aquifer, or collected in a rain barrel.”

Not so, says Zetland. Water is not even close to fungible. Transportation costs that are prohibitively high relative to value per unit prevent icebergs and aquifers from being interchangeable. “Go get $1 of tap water (about one cubic meter) and then move it to the other side of the room, “  he suggests.  “Hard to do?  Sure, since 1,000 liters weighs one ton.”  Transportation costs alone guarantee that water systems and markets will never be integrated the way markets for oil, gold or computer chips are.

Next, Zetland points out that it is highly misleading to compare speculation in water (or other commodities) to speculation in financial derivatives. Commodities like food and water ultimately have to be delivered to users. Food or water derivatives cannot affect delivered prices, he says, unless spot prices are benchmarked on derivatives, which would be silly. He sees the disconnect between financial and physical markets is strongest for speculators and weakest for real users.

Real world water markets, which are inherently local and regional, are, where they have been tried, highly effective in reducing water waste and redirecting water from the rich and politically powerful to the poor. Zetland cites water markets in Australia (MDB), Chile, Colorado Big Thompson, and occasional market activity in other parts of the United States as examples.

The real danger, says Zetland, comes not from speculators but from “journalists who turn a few shallow anecdotes into a problem that can be solved in ways that won’t work.” As he sees it, the trouble with loosely-reasoned stories like Kaufman’s Nature piece is that “people with limited attention rely on ‘prime time’ outlets rather than studying complex problems. That means that mistakes in those outlets can lead to an abundance of bad decisions.”

Zetland’s bottom line is that “journalists can cause a lot of damage when they misdiagnose problems, offer the wrong solution and appeal to fear, uncertainty and dread. What they need to do—and  what I try to do—is explain the facts and barriers to change before suggesting gradual reforms to improve our water management.”

My own recommendation: Anyone looking for clear thinking about water and water markets needs to check out Zetland’s Aguanomics, both the book and the blog.


7 Responses to “Is Wall Street’s Thirst for Water Really a Dire Threat? Nonsense, Says David Zetland”

ThomasGrennesNovember 1st, 2012 at 3:17 pm

Norway has established private property rights in water in ways that allow long distance trade in water and hydro-electric power. Also giving landowners control of fishing rights has also contributed to cleaner water. The fact that some water is essential for life, does not mean that supply and demand are irrelevant to water issues.

GuestNovember 6th, 2012 at 9:03 am

One option for clean water is low cost clean energy. Las Vegas reuses 95% of their water through a system of pipe transport, water clean up systems and lakes.

Ed Dolan EdDolanNovember 6th, 2012 at 9:49 am

Yes, I agree, low-cost clean energy would solve a lot of problems, and water would be one of them. Right now we seem to be stuck with a choice between low-cost dirty energy and high-cost clean (or sightly cleaner) energy. It is a real bummer.

falk burgerNovember 6th, 2012 at 11:43 am

One of the examples used to refute Kaufman, oil, actually supports his view. Oil is moved all around the world, and it used to sell for a couple of bucks a barrel! Price is the great equalizer, and price is driven by demand and supply. Who controls either demand or supply, controls price; greedy weasels will build the infrastructure as always. Thanks, as, uh, …how did that go?

Peter SchaefferJanuary 8th, 2013 at 10:01 am


Oil is worth roughly 10,000-20,000 times as much as water on a volumetric basis. An acre-foot of oil is 7,758 barrels or $775,800 at $100 per barrel. An acre-foot of water is worth far less, particularly for agricultural use. Note that households pay much higher prices for water than farms. That's mostly because of the cost of sewage treatment.

BogwoodDecember 16th, 2012 at 10:44 am

Looking to collect examples of semi-worthless "paper" derivatives. One these was featured in a TED talk on Montana water rights. The government issues the rights to gallons or acre feet but the actual streams are dry. The rights still trade on the hope for rain.

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