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.