Water, a critical renewable resource, has just started a multi-year boom, which should leave even oil behind. Throwing out the baby with the bathwater is an idiom that has its origins on the monthly bathing ritual in Europe before the 16th century. The bathtubs were few, and seniors of the house were the first to take a bath, the children of the house came last. The very reason: they threw the baby with the muddy and dirty bath water on occasions. It’s tough to validate this socionomic anecdote. Were some of our ancestors low on hygiene, or was it about water scarcity and economizing of a resource? The fact is that water has moved from abundance to deficiency through history, and our ancestors did face water scarcity in the past, which might have forced them to change their habits.
The question of water is more relevant than the energy question which faces the world today. It’s just that the speculator has not understood water economics yet, as he is busy with other assets. Water has traditionally been a state domain and inefficient—the very reason it’s discussed less.
Water outperformed oil from 2004 till 2006 and 2007 is not over yet. Water averaged 21 percent returns a year over the last three years. The returns might look meager if you compare it with the 40 percent average returns for the Sensex. But equity vs. water looks comparable if you take the average return on the Sensex from 1990. The benchmark gave an annual performance of 22 percent over the last 17 years. And the way things appear, water may not just outperform oil but the Sensex as well.
Water, a part of the alternative energy sector, is just one of the many thriving assets today. Alternative energy is not new anymore. Solar Index, BioEnergy Index, Renewable Energy, and Water Index are some of the benchmarks listed and traded today. And renewables already take care of 13 percent of the world energy needs, 34 percent is oil, 21 percent is gas, 25 percent is coal and 7 percent nuclear. Renewables lead nuclear fuel today. So what we might be fighting for is not that oil stock but the real scarcity of water and few stocks in a high potential alternative energy sector.
Al Gore’s Nobel Prize-winning work also makes a strong case for understanding the alternative energy and water sector. The opportunity in a crisis, he mentions in his work, is for real. Water connects with a crisis and an opportunity. And it’s also linked with our food and the consequences of global warming. Food is critical for prosperity, and water is essential for the agro sector. The book An Inconvenient Truth: The Planetary Emergency of Global Warming and What We Can Do About It mentions the submerging of parts of Bangladesh, Kolkata, and some American and European cities. These are facts known to climate watchers for many years, but we have just started noticing it now. With more than a billion people worldwide without access to adequate supplies of safe water, the scarcity is still real.
So what are we doing about it? The United States, the grand champion of free-market capitalism, delivers water by the public sector. In France, private companies have been distributing water for 150 years, and Suez is a global sector leader. Water is capital intensive and not a simple sector to understand and invest.
The industry in developed countries used more than 40 percent of total water withdrawals versus 10 percent in developing countries. If pollution increases in these countries and water consumption are not regulated, clean water will become scarcer. The developing world will need about $600 billion or more to augment water reserves and meet water quality needs. And the rate of return constraint, where utilities are limited to a 5 percent return over costs, fails miserably. Markets remain the best mechanism for allocating resources.