Our water is running out

You’ve got rather used to turning on the tap, and having water come out. You probably think that our water supply is fairly reliable.

But you’d be wrong.

Globally, water is in a crisis – and it could affect you far sooner than you think.

Let’s get this problem into perspective. Start by listing all the things you use water for. You’ll probably quickly add showering, washing clothes, and drinking. But if you think that’s captured your main use of water, I’m afraid you’re entirely wrong.

The vast majority of the water you use isn’t in the home at all – it’s “embedded” in the products you buy. For example, it takes nearly two-and-a-half tonnes of water to make one hamburger. This isn’t all drinking water – but it’s still needed for the farming and manufacturing processes.

You may imagine that the water used in this way all falls as rain. But again, you’d be wrong. Much of the water we’re using doesn’t come from precipitation at all. It comes from groundwater, extracted via boreholes. That would be fine, if the groundwater was topped up as fast as we use it – but that’s not happening. Groundwater is being used unsustainably all over the world.

When a resource is used unsustainably, it will eventually run out. The terrifying truth is that global water supplies are running out – and very rapidly.

Instead of thinking about water like a resource that’s extracted from rivers, it’s better to think of it more like oil. Freshwater is, in many cases, something that’s dug out of the ground – then it’s used once, and lost forever.

The way that resources like this are extracted, and depleted, follows a predictable mathematical pattern – and it’s called a Hubbert curve. This looks very like the bell curve of a normal distribution, but it’s actually derived in a different way. This predictive approach works pretty well. We can see from the rise and fall of conventional oil in the US how valuable this approach is in resource planning: there was a huge peak in US oil production during the last century. This then tailed off as fast as it rose – leaving America dependent on foreign oil. The only thing that broke the relationship was when the vast unconventional oil reserves were recently tapped.

And so it is with water. The production will rise, and then it will fall. To give one specific example, the Ogallala aquifer under Kansas will be two-thirds depleted by 2065 – and when it’s gone, it’s gone. Other areas of the world may lose their groundwater even faster.

But what will happen when the water runs out? Well, as you can imagine, things will get pretty nasty…

We can see some early indications of this situation in Syria. As the country has collapsed into one of the most brutal wars of the 21st century, you could be mistaken for thinking that the war was simply a product of civil unrest, or religious differences. Those explanations might help our understanding of who’s fighting whom – but it doesn’t do much to explain the origins of the war. In fact, the “Arab Spring” was partly triggered by rising food prices throughout the region. In Syria, a drought coincided with diminishing groundwater supplies, exhausted by unsustainable exploitation over recent decades. Subsidies for irrigation have seen the water table in areas around Damascus falling by around nine metres per year – around the height of a typical house. This loss meant falling yields, and rising costs for farmers. Many people abandoned the countryside, and headed to the cities to look for work. This impoverished, restless population started the protests that ultimately lead to war.

Today, we have a perfect storm arising in water. Populations are rising rapidly – with a total of ten billion expected in due course. Affluence is growing around the developing world – leading consumers to demand the water-hungry diets that are familiar to westerners.

Furthermore, as development progresses, more and more people are moving out of poverty and connecting houses and workplaces to the piped water network. This would all be fine if we had enough water – but we don’t. The Middle East, the American West, and the Indian subcontinent, are all areas with severe water crises expected in coming decades.

The long-term trend in water availability is therefore dangerously negative. To get this problem in perspective, consider the warning from the International Food Policy Research Institute (IFPRI). They advise that water stress will put over half the world’s population, and half the world’s grain production, at risk by 2050.

So how can you, as an investor, play this trend?

It’s important to remember that increasing water stress is a “megatrend” – something that will touch on every portfolio. It’s simply not something you can avoid, when it comes to investing.

In general, the best approach is to avoid those investments that rely on unsustainable water use. For example: backing an almond processing plant in California’s central valley is probably not a very clever move. Although this area is a very productive agricultural region, it’s also experiencing profound water stress. With a triple crisis of diminishing groundwater, climate change and a booming local population, we can expect things to get very tricky indeed for California’s growers. Thirsty crops, like almonds, will be the first to go.

It might seem amazing for a developed economy with a well-understood water crisis – but California doesn’t have any form of permitting for groundwater extraction. Farmers can pump as much as they like. This process has actually led to large-scale subsidence throughout the San Joaquim valley – with some areas falling at a rate of 0.3m per year. This quote, from National Geographic, sums up the situation: “Central Valley wells that used to strike water at 500 feet deep must now be drilled down 1,000 feet or more, at a cost of more than $300,000 for a single well.”

California is a microcosm of an expanding global crisis. We’ll see more and more agricultural regions drying up in coming years – and farmers will have to switch crops. Many will ultimately have to abandon their farms – just as they did in Syria.

This is a “bad news” story, that much is clear. However, there is a great investment case for tools and technologies that can help reduce the impact of this water crisis. There are a slew of relevant techniques, from desalination to drip-irrigation – and we’ll hopefully be able to cover these in future issues of Exponential Investor.

Category: Commodities

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