A liquidity crisis of a different kind
Forget the Financial Crisis…Are we on the cusp of a global water crisis?
Back in September 2012 we read a report that stated:
“Water withdrawals used in the energy process across virtually all resources (coal, natural gas, oil, nuclear, and alternative) surpasses the amount of water used for agricultural irrigation. In the U.S., power plants account for nearly half of all water withdrawn from the nation’s rivers, lakes and seashores each day. Nearly half of the power generated in the U.S. is derived from facilities that don’t use any water-saving cooling systems, and the record drought this year has forced some plants to shutdown or reduce output. However, nowhere is the water-energy conflict more intense than Asia. China and India plan to construct $720 billion of coal-burning plants over the next two decades, accounting for 60% of the world’s coal fired power plants on the drawing boards through 2035, and equivalent to more than twice today’s total power capacity in the U.S. However, coal uses three times as much water as natural gas-fired stations per unit of power produced. In 2010, global water demand exceeded supply, with consumption totaling 4.5 trillion cubic meters versus accessible supply of 4.2 trillion cubic meters, according to McKinsey & Co. As water scarcity rises, conflicts with energy will increase, driving the migration to power production and cooling technologies that consume less water.”
March 2013 we read:
“We have argued…that growing water shortages would have significant economic and geopolitical implications. In March 2002, we also analyzed how the wars of the 21st century would be about water, further exploring the escalating water tensions between China and India. The Population Institute estimates global demand for freshwater already exceeds supply by 17%, and the gap is expected to grow to 40% by 2030, according to McKinsey. By 2030, the OECD projects that 47% of the world’s population will be living in areas of high water stress, while the U.N. forecasts that 30 nations will be water scarce by 2025, up from 20 in 1990. There are currently at least nine major danger zones for conflict over water encompassing Asia, the Middle East, and Africa, and at least five significant litigation water wars also loom in the U.S. between cities and states, due to persistent drought.”
And today we read from The Business Times and elsewhere that:
“Tests conducted on Thursday and Friday (a fortnight ago) showed that tap water in Lanzhou, the capital of northwestern Gansu province, had as much as 200 micrograms of benzene per litre, 20 times the national limit, the official Xinhua news agency said, citing local environment authorities.
Benzene is an aromatic, colourless liquid and a basic raw material used in the petrochemical industry. Human exposure to the chemical increases the risk of cancer and other illnesses.”
The Business Times reports; “Sixty per cent of underground water in China which is officially monitored is too polluted to drink directly, state media have reported, underlining the country’s grave environmental problems.
Water quality measured in 203 cities across the country last year rated “very poor” or “relatively poor” in an annual survey released by the Ministry of Land and Resources, the official Xinhua news agency said late Tuesday.
Water rated “relatively” poor quality cannot be used for drinking without prior treatment, while water of “very” poor quality cannot be used as a source of drinking water, the report said.
The proportion of water not suitable for direct drinking rose from 57.4 per cent from 2012, it said.”
Finally, the World Bank’s Ismail Serageldin puts it succinctly: “The wars of the 21st century will be fought over water.”
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Ben Godfrey
:
Aaah the old water scarcity meme. We should be reminded that there is technology in use right now – today – that can make water from the atmosphere from the exhaust of a diesel engine or from a gas generator. This technology generates water as a by product of the energy creation process – essentially free of cost. Yes there is a lack of fresh clean drinking water in 3rd world countries – there always has been, but in the 1st world don’t believe the hype.
xiao fang xu
:
well there is a problem : water shortages.
Question is Why ?
well no Private property of water collection ,distribution and pricing.
Who have monopoly on this ?
Governments all over the world.
Any surprise ????
The first thing to be said about this is that on the free market, regardless of the stringency of supply, there is never any “shortage”, that is, there is never a condition where a purchaser cannot find supplies available at the market price. On the free market, there is always enough supply available to satisfy demand. The clearing mechanism is fluctuations in price.
Note that all goods and services are scarce, and the progress of the economy consists in rendering them relatively less scarce, so that their prices decline. Of course, some goods can never increase in supply.
If the water industry were free and competitive, the response to a drought would be very simple: water would rise in price. There would be griping about the increase in water prices, no doubt, but there would be no “shortage”, and no need or call for the usual baggage of patriotic hoopla, calls for conservation, altruistic pleas for sacrifice to the common good, and all the rest. But, of course, the water industry is scarcely free; on the contrary, water is almost everywhere in the U.S. the product and service of a governmental monopoly.
When the drought hit northern California, raising the price of water to the full extent would have been unthinkable; accusations would have been hurled of oppressing the poor, of selfishness, and all the rest. The result has been a crazy-quilt patchwork of compulsory water rationing, accompanied by a rash of patrioteering ecological exhortation: “Conserve! Conserve! Don’t water your lawns! Shower with a friend! Don’t flush the toilet!”
Well, the amusing aspect of all this is that these imbecile exhortations were as manna from heaven to the wealthy liberal elitist ecofreak population of the San Francisco Bay Area. The California water authorities were hoping and shooting for a decline of about 25% in 1977 water consumption as compared to 1976. But, lo and behold, in late June, the figures rolled in and it turned out that Bay Area communities had responded by voluntarily cutting their water consumption by 40-50%.
The “morality” of the Bay Area masses had exceeded everyone’s expectations. But what was the reaction to this onrush of patriotic altruism and self-sacrifice? Oddly enough, it was mixed and ambivalent—thereby pointing up in a most amusing way some of the inner contradictions of statism. For suddenly, many of the local governmental water districts, including San Francisco’s, realized that dammit! they were losing revenue! Now, water shortage is all well and good, but there is nothing more important to a bureaucrat and his organization than their income. And so the local California water districts began to scream: “No, no, you fools, you’ve ‘over-conserved.’” (To a veteran anti-ecologist such as myself, the coining of the new term “over-conserving” was music to my ears.) The water districts began to shout that people have conserved too much, and that they should spend more, for which they were sternly chastised by the state water authorities, who accused the municipal groups of “sabotaging” the water conservation program.
Meanwhile, other local ecologists and statists got into the act. They groused that the over-conservation had induced people not to water their lawns, which led to the “visual pollution” “unsightly” lawns, and also caused the dried leaves to become fire hazards, which is apparently another ecological no-no.
I can see it now: a debate within the wealthy liberal ecofreak community: Mr. A.: “Dammit, you’ve over-conserved water; your lawns are visual pollutants, and your dry leaves are endangering the environment through fire.” Mr. B.: “You’re a blankety-blank no-good sellout water waster. You guys have been urging me for years to conserve, and now I’m doing it and all I get is hassle.”
The culminating irony has been the reaction of the local water districts to the “threat” of “over-conservation” of water and the consequent loss of revenue to the governmental water districts. The response of the Bay Area districts was: “Sorry folks, we have to raise the price of water in order to maintain the beloved revenue of the water district (us.)” So, “over” conservation has led to an increase in the price of water. It is intriguing that raising the price of water in order to ration increased scarcity is universally considered to be reactionary, selfish, and Neanderthal, while raising the price of water in order to keep governmental water district revenues at their former level is considered perfectly legitimate, and barely worth commenting on. And so, the water price goes up anyway, though for the wrong reason and of course not in order to clear the market.
The most amusing aspect of this California water caper was the argument of a water district apologist on San Francisco television:
Q. But wouldn’t the poor be hurt by the water district raising its water prices?
No, for since everyone has cut their consumption of water, the total water bill of each poor person will not increase.
In short, the poor are not being hurt by the higher price because, being forced to cut their consumption, their total bill has not increased. Thus, a price rise by aprivate firm is always selfish and oppressive of poor people; but when a monopoly governmental agency increases its price, the poor do not suffer at all, since if they cut their purchases sufficiently in response to the higher price, their total dollar payments will not increase. It is this sort of nonsense that our statists and busybodies are now being reduced to.
Meanwhile, how is “libertarian” Milton Friedman, now resident in the San Francisco area, taking to the water crisis? Is he advocating privatization, free competition among private water companies? Is he at least advocating the setting of a market-clearing price by the government water company? The answer to all of these is, remarkably, no. In his Newsweek column, Friedman favored keeping government water rationing, but making it more efficient through a typically elaborate scheme for surcharges for consumption over a certain quota of water, to be financing rebates for consuming under the quota. Thus, once again Friedmanism descends to being an efficiency expert for statism.
The Water Shortage Myth
The two main environmental news stories of the past year or so have been the twin impending disasters of global warming and water shortages. There is a scientific consensus that global warming is occurring, and many governments (including, belatedly, the Bush Administration) have taken steps to address the problem.
But the more pressing issue is water; people can live with global warming (and have been for some time), but people cannot live without water.
While drinking water is the most obvious need, everything around us takes water to produce, from food to telephones to tires. Not only is agriculture dependent on water [the U.S. Geological Survey estimates it takes about 1,300 gallons of water to grow a hamburger] but so is virtually every industry. Even energy production needs water, in hydroelectric dams and nuclear reactor cooling towers.
Demand soars
The barrage of news reports warn of a dire water shortage, and provide sobering statistics:
The global demand for water has tripled over the last 50 years, while water tables are falling in many of the world’s most populated countries, including the United States, China, and India.
Many of the world’s great rivers are a fraction of the size they once were, and some have dried up completely.
Earth’s lakes are vanishing at an alarming rate; the Aral Sea, for example, is less than a quarter its original size. Nevada’s Lake Mead is half its original capacity; a recent study concluded that there is a 50/50 chance that the lake will be gone in less than fifteen years.
It’s true that there is cause for alarm, but to understand the problem people need to read behind the headlines to understand one little fact: There is no water shortage.
Our planet is not running out of water, nor is it losing water. There’s about 360 quintillion gallons of water on the planet, and it’s not going anywhere except in a circle. Earth’s hydrologic cycle is a closed system, and the process is as old as time: evaporation, condensation, precipitation, infiltration, and so on. In fact, there is probably more liquid water on Earth than there was just a few decades ago, due in part to global warming and melting polar ice caps.
The problems
No, there is plenty of water. The problem is that the vast majority of Earth’s water is contained in the oceans as saltwater, and must be desalinated before it can be used for drinking or farming.
Large-scale desalination can be done, but it is expensive.
But nor is the world running out of freshwater, either. There’s plenty of freshwater on our blue globe; it is not raining any less these days than it did millennia ago. As with any other resource, there are of course regional shortages, and they are getting worse. But the real problems are availability and transport; moving the freshwater from where it is plentiful (such as Canada, South America, and Russia) to where it is scarce (such as the Middle East, India, and Africa). Water is heavy and costly to transport, and those who can afford it will always have water.
Water, not global warming, is likely to be the greatest environmental challenge facing the world in the coming decades and centuries.
To find solutions, it’s important to understand the problem. Water is never really “wasted.” It simply moves from one place to another. If you let your faucet drip all day, that’s clean water going back into the system, the water isn’t “lost.” What is lost is usefulness, money, and energy, because it takes energy to purify and distribute the water.
Water conservation is very important, but not because there is a shortage of water; it is the ultimate renewable resource. As with any resource, the issue is getting it to those who need it.
Adam Novek
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We live in a sad-sad world. Thanks for the article.
garry howlett
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45 years ago my grandfather said “one day we will be paying more for water than petrol”. We all laughed.
On the weekend I watched people have no problem lining up for 500mls of water and pay $3.00 for it.
I lined up to buy petrol at $1.55 a litre and was irate at the price.
Are we not already putting a lofty valuation on water?
Roger Montgomery
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interesting obervation. Question is, how much wider could the spread get?
sally.moore.7798
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Thankyou for this discussion Roger, Michael and Andrew. The prospect of wars over water in the 21st century looms even larger given “robust evidence” showing the water cycle on the planet is intensifying at a rate of about 8% per degree C of surface warming (CSIRO) ie higher rates of evaporation, more intense “flash” droughts and floods – I feel a sense of forboding at the prospect of my children living in a world with a water cycle intensified by 16-24% in a 2-3 degree C warmer world. Even now over 95% of California is in severe drought facing a summer with only 33% snow pack to melt out for water supply to the one major river Colerado River on which 30 million people depend and this area is supposed to provide 15% of that country’s food (see latest blog Dr Jeff Masters meterologist Weather Underground). But as Michael points out it is the billions of poor people who do not have access to safe drinking water that suffer unimaginably.
Wars triggered in part by water issues have already begun to occur. US National Security analysts say that climate change is a threat multiplier to already stressed societies. One of the possible triggers to the Arab Spring is thought to be rise in commodity prices in 2010 due to droughts in Russia, Ukraine,China and Argentina and torrential storms in Canada, Australia and Brazil – all major wheat and grain producers ((Scientific American). Russia’s worst heatwave since records began over 130 years previously triggered several hundred wildfires in 2010 – the resulting smog and heat killed 56,000 Russians according to Munich Re (Wikipedia) and forced Russia to stop wheat exports for a year. Also between 2006-2011 60% of Syria experienced one of the worst long-term droughts in modern history and displaced 1.5 million people within Syia with around 75% of farmers suffering total crop failure and moving into urban areas already experiencing stress due to influx of Palestinian and Iraqi refugees – harsh climate conditions led to large population movement and instability as one of several contributing factors triggering civil war. In 2011 NOAA released a report showing prolonged drying in Middle East and Mediterranean was linked to climate change (Washington Post). Its not hard to see how wars will occur over water this century.
I am no maths genius but what really knocks the stuffing out of me is contemplating the quantity of energy scientists are saying is trapped by increased greenhouse gases in the atmosphere instead of dissipating out into space – over 90% of this energy is warming the ocean covering 70% of the earth’s surface at a rate equivalent to 4 Hiroshima bombs per second (see John Cook winner of 2011 Australian Museum Eureka Prize for Advancing of climate change knowledge). Us land-based creatures are only experiencing a tiny percentage of that energy and I can barely comprehend the vast quantity of energy slow cooking the ocean as a consequence of digging up vast quantities of carbon and putting it in the atmosphere.
It would be nice if there was more discussion on these challenging issues rather than silly hysterical name calling “earth worshipper” “climate denier” “warmist” particularly since our children will have to live with these issues in their adult lives. Lenore Taylor reported that the federal government’s review of renewable energy target headed up by self-professed climate sceptic Dick Warburton has concluded that fossil fuel investors won’t need to factor in any risk due to climate policies for decades. Perhaps Dick has some very good reasons why we should not have policies that would transition our economy away from fossil fuels for decades. I suppose we rely on coal economically but do we need to diversify the economy and be less dependent on coal just in case the world decides to limit global warming at some stage or just carry on doing what we’ve done before and pretend we don’t know what the outcome will be for our kid’s future and future generations.
Andrew Legget
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Very interesting Roger. I can’t help but think that society would do well to learn a core lesson from the world of finance which is the principle of diversification. I believe whilst coal may be a cheap and reliable source of energy, it should only form part of a wider portfolio of energy producing assets. This is not only because of the environmental impact but just the fact that it is also not a renewable resource.
The only thing more or equally important than water is air. Without these two then it doesn’t matter whether we have energy to turn on our heaters, lights etc.
Surely the future supply of water is more important than any economic benefit from industries which use it in ways that appear unsustainable.
Roger Montgomery
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One can only agree with those sentiments Andrew.
Michael Brydon
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Roger, in consideration of Andrews point “Surely the future supply of water is more important than any economic benefit from industries which use it in ways that appear unsustainable.”
Could you share any simple ethical/sustainability guidelines Montgomery Fund consider in its investment strategy?
Michael Brydon
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Hi this is a wonderful topic. In 2008 I did some research on water during the Queensland drought. Here are some interesting facts from the World Health Organisation and United Nations.
70% of the earth is covered by water, 97.5% is saltwater, only 2.5% freshwater. 2% of freshwater is locked in polar icecaps, glaciers, the atmosphere and soil leaving less than 1% available for human consumption. Out of 191 nations in the world 10 share 65% of the worlds annual water resources. United Nations estimates that 1.2 Billion people 1 in 5 people do not have access to safe drinking water…….this leads to enormous sanitation problems disease and dying from lack of available suitable water.