Friday, June 30, 2006
Blue gold. Yes, in case you didn't know: water really is blue. Why is water blue? And, as population and water demand grow, blue gold may replace the black gold of oil, especially if biofuel and biomass become the substitute for oil.
So where are the water markets? Sure, we all know about western US water marketing and about moves by international companies to invest in privitized water development in developing countries. But where's the commodity market?
Myra Saefong of Marketwatch reported on that today:
Water is about as precious as a commodity can get and it still hasn't been graced with an official trading platform of its own. It's necessary for survival, only about 1% of the water on earth is suitable for consumption and people in the United States use about 1,000 times more water each day than gasoline.
"Fresh water is certainly a more valuable commodity than crude oil, but crude oil doesn't fall out of the sky either," said Jim Wyckoff, a commodities analyst at TradingEducation.com.
And at much less than a penny per gallon at the tap compared with gasoline's nearly $3 a gallon, water is a real steal. In fact, you can refill an 8-ounce glass of water approximately 15,000 times for the same cost as a six-pack of soda, according to the American Water Works Association.
"Clean, fresh water is not only the most vital commodity -- it is also the most undervalued," said Bernard Savaiko, an economist at the New York Board of Trade. Despite the nearly-free cost of the resource, people dish out billions of dollars each year to buy bottled water, making it the fastest growing drink choice in the nation, according to a late 2005 report from the Environmental Protection Agency.
Bottled water can cost as much as 10,000 times more than tap water, according to the Earth Policy Institute, and the U.S. is the world's leading consumer of it, at around one 8-ounce glass per person every day.
All told, U.S. consumers withdrew about 408 billion gallons of water per day for all uses in 2000, according to the most recent data from the U.S. Geological Survey. Freshwater use, which includes ground and surface water, ran at about 340 billion gallons per day....
Water is "the first and last great commodity," said Phil Flynn, a senior analyst at Alaron Trading in Chicago. Even so, it still doesn't have a publicly-traded market -- nothing similar to the oil futures which help dictate market prices -- and that probably won't happen anytime soon, analysts add. But with the U.S. population headed for the 300 million mark later this year, and the world figure above 6.5 billion, "people theorize that the next great competition over supplies will be for fresh water," said Flynn, adding that the supply of drinkable water is becoming tighter and tighter.
At some point, "it's going to be the oil market of the future," he said.
Oil's twin? Indeed, the similarities water has with oil are striking.
Fresh water is "a commodity that is a necessity and the supplies are finite," said Wyckoff. It's in demand, potentially in tight supply with limited sources, domestically produced and its price fluctuates based on market conditions," said Flynn. It's also deliverable -- "you could sell it from a solid source where you could guarantee delivery."....
And the cost and nature of production differs from oil, he said."Different places have different costs of production," he said, pointing out that Los Angeles gets its water from the Colorado River, while Iowa can, for example, drill 30 feet and have a virtually unending supply of water. In Saudi Arabia, the fresh water has to go through desalination plants that make the process costly, but it's the country's only source of fresh water.
The water industry has talked about the development of a tradable market
Not Likely. Why? Simply put, "from a practical standpoint, it's not really cost-efficient to move it long distances or to store it," said Nybot's Savaiko. Oil is about $70 a barrel, or $1.67 a gallon, and we're paying about one-third of a cent per gallon of high-quality water from our taps, said Dr. Peter Gleick, president of Pacific Institute, an independent think-tank based in Oakland, Calif. If you
fill a tanker with oil, you have something worth money; you fill up a tanker with water, and you don't," he said. "Very quickly, your shipping costs kill you." Given that, "water is unlikely to ever be a global commodity," he said. The U.S., particularly California, is becoming more efficient in water use and water use is leveling off, even as the population and economy grows, he said. The nation uses less water for everything than it did 20 years ago.
"It's cheaper to save a gallon of water than to go and find a new gallon from the environment," he said. And besides looking at the technical issues involved with any commodity, such as delivery and storage, the basic question, according to Savaiko, is: where do you find the sellers?
"There's plenty of demand, but where would the sellers come from? Would you want to be short water?"
it wouldn't be a surprise to see water traded as a commodity. "After all 98% of the world's water is salt water [and] the world's lakes, rivers and streams account for just 1% of the fresh water," said Sean Brodrick, an editor at Weiss Research. But instead of seeing the resource traded on an American exchange, he'd "look to one of the foreign exchanges with real vision to start trading water." And standards for water would have to be set, he said, much like the Brent standard for crude. On a global scale, "supply and demand are on a decisive collision course here, whereby the world supply of drinkable or potable water is quickly shrinking," said Savaiko. There's going to be more emphasis on desalination to make up for the shortfall created by the finite supply of water, so the price of water may eventually rise to meet the cost of that process, which ranges from $2 to $3 per 1,000 gallons, he said.
Currently, on a local scale, there actually is a market for water. Farmers in California, for example, are marketing water to cities because farmers pay very little for water and cities are willing to pay a lot more, said Gleick. If farmers in California pay 20 to 40 cents per 1,000 gallons of water, they can sell it to cities for 10 times that amount, he said.
And on a transaction-to-transaction basis, water is sold or leased in states where the legal structure allows this, and most delivery is made in close proximity to the source," said Coy. Where water is sold, it's sold as the "right to pump a certain amount of water from an aquifer or the right to take a certain amount from a stream or river," she said.