Thursday, August 28, 2008

The “New Oil”, or just the Same Old Water?

Well, unfortunately I''m laid up with a bum knee this week which has limited by ability to get around. This has resulted in me missing yesterday's City/County Water Study meeting (this week was mostly about population projections and available water resources to serve that population) and a brown bag at the Water Resources Research Center discussing policy updates at the Central Arizona Groundwater Replenishment District. Instead I have been lounging around the house thinking about water supplies and economics as evidenced below.

Seems like every time I turn around someone else is proclaiming that water is the “new oil” – implying it is the next vital natural resource coming under ever greater supply constraints due to population and economic growth. The latest example is found in last week’s Economist in the first article in their business section – “Running dry” (can be found at ). There may be some truth to that statement – limitations on the availability of water, just like oil, can result in limits on growth and higher prices to sustain the standard of living we are accustomed to. Competition between water-rich and water-scarce areas is likely to increase in the future. But there are some significant differences between oil and water that make the comparison inapt.

First of all, oil is completely consumed when it is extracted and used – once used it cannot be recovered in any form (except by removing CO2 from the atmosphere or waiting for that CO2 to be taken up by plants, then geologically buried, compressed, and heated to form more oil – an admittedly time-consuming process). Water is not typically used consumptively, although it may no longer be available for use in the same location if used in a way that results in evaporation, transportation, or transformation (i.e. into corn or beef). It can also be lost by flowing downstream to another state or country or ultimately into the ocean. But water is never truly lost because it merely reenters the hydrosphere, or water cycle, to be later returned as rain or snow to a surface or groundwater reservoir where it will once again be available for consumption.

Secondly, and perhaps more importantly, water is almost never priced as a scarce resource – even in areas where it truly is a scarce and irreplaceable resource (such as where it is produced by mining groundwater reservoirs). While recent history has shown that oil is relatively price inelastic – demand is not significantly curbed by modest rises in price – it is nonetheless priced as a finite commodity, with price rising significantly as supply constraints become ever greater. Water is almost never priced to reflect its true value to the consumer (bottled water is one exception). Most domestically supplied water is priced in a way that reflects the delivery costs but there is no cost for the water itself – water is in most cases completely valueless. But consumers clearly place value on the availability of clean water – just look at what we’re willing to pay for bottled water.

People who live in water-scarce environments have always appreciated the value of water to society. Just look at the wealthy trading communities that clustered around water sources in the Middle-east or the American Southwest 1000s of years ago. For people in these areas water is not the “new oil,” its just the same old water. For people in the Eastern U.S. or parts of Western Europe that are facing water supply constraints for perhaps the first time ever – sure water may seem like the new oil. But it’s important to remember the differences between those two valuable liquids and develop appropriate responses to scarcity of each. Oil is destructible but also replaceable. Water is indestructible but irreplaceable. That makes a big difference in how you respond to crisis.

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