Enron-ization of Water: Wall Street’s Pending Resource Grab

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By Don Quijones, Spain & Mexico, editor at WOLF STREET. His blog: Raging Bull-Shit.

As Leonardo Da Vinci once said, “water is the driving force of all nature.” It could also soon become the driving force of immense corporate profits and financial sector returns. For water is not just an essential public and natural good, it is a precious resource whose growing global scarcity has the potential to turn the content of rivers, lakes and reservoirs into transparent liquid gold.

The problem of water scarcity is growing at an alarming rate. By 2050, experts forecast a 55% increase in the amount of water required to meet demand from rising populations, food production and industry. Failure to meet that demand will have devastating consequences: water shortages will become chronic, leading to the proliferation of water riots and water wars. According to UN estimates, $1.8 trillion in new investments will be needed over the next 20 years to avoid such a calamity. The question is:

Whence Will That Money Come?

According to the wise masters of big capital and finance, there can only be one source: the ever-knowing, ever-perfect financial markets. Writing in the Daily Telegraph, Andrew Critchlow argued the case for financializing water:

Markets can play an important role in providing future water security (DQ: Note the use of the term “water security,” not “water independence” or “water sustainability”). The City can help to fund vital water infrastructure and the creation of a futures market to trade water would help to create a baseline pricing mechanism against which regional water tariffs could be fairly set…

“Water will become something that is traded, there will be a market for it and this could happen in the next decade,” said Usha Rao-Monari, chief executive officer of Global Water Development Partners – an affiliate of New York-based investment giant Blackstone, the world’s largest private equity firm with a reported $280bn under management.

The reasoning is clear: in order to create more efficient distribution of the world’s most vital resource, we need to create myriad new layers of middlemen and financiers and have them trading billions (if not trillions) of dollars in derivatives of that scarce resource on global commodity exchanges. It will be the Enron-ization of water, as the exact same people who almost destroyed the global economy with mortgage-backed securities and credit default swaps and who have corrupted the basic pricing mechanism of just about every commodity market on the planet will be entrusted to determine the price of the water we consume.

“It’s intuitively appealing to talk about water as a traded asset,” said Deane Dray, a Citigroup analyst who heads up global water-sector research. “If you look at projections over the next 25 years, you’ll see that global water supply and demand imbalances are on track to get worse.”

Turning Water Into Liquid Cash

Where there is scarcity, there’s the potential for serious profits – especially when the biggest profits do not come from buying or selling real things (such as houses or wheat or cars), but from the manipulation of ethereal concepts like risk and collateralized debt. As Frederick Kaufman writes in the journal Nature, these days most wealth flows from financial instruments that are at least one step away from reality.

That’s not to say, however, that global water derivatives trading is a fait accompli. Water supply remains a local issue all over the world. It’s prevalent in areas you don’t want it, often leading to flooding (think Bangladesh), and it’s scarce in areas you need it, such as densely populated and arid areas (think LA). As for pricing, every country values it differently, and there’s no uniformity at all.

For instance, water is free in Ireland. “They consider it a right,” says Dray. “That’s part of what you have to overcome” [DQ: ‘you’ basically meaning ‘we’ as in ‘we, at Citigroup’]. “Twenty-five years is a long time for some of these notions to change,” he said.

But as the old adage goes, where there’s a will, there’s a way. And when it comes to the financial services industry, the strength of its will is formidable and the reach of its influence unmatched. Indeed, big changes in water pricing and distribution are already afoot. The world’s driest inhabitable continent/country, Australia, has already launched a water futures exchange. Since it opened in March this year more than 1.6 million Australian dollars in forward contracts – representing about 16.5 billion liters of water – have changed hands. In Texas they’re thinking about doing the same for the Rio Grande.

“Water will be the commodity of the 21st Century,” says Richard Sandor, the CEO of Environmental Financial Products and the man widely credited with the creation of interest-rate futures – now one of the world’s largest and most manipulated markets – and the Chicago Climate Exchange. As Sandor told CNBC, water trading would have to be based on the dynamics of regional markets – and as it just so happens, he’s been working on a plan. “I think we’re going to have to invent something that takes into account the varying geographical differences. We’ll have to figure that out,” he said.

A Disturbing Precedent

If Sandor and his cohorts do figure out a way to financialize water, the world’s most valuable natural compound will be exposed to the exact same speculative forces as have plagued the global food industry for the last two decades. In the 1990s, a host of new food derivatives were created and billions poured into the sector from hedge funds, private equity groups and investment banks – including the bank everyone loves to hate, Goldman Sachs, which according to Der Spiegel has its greedy tentacles in 25 to 30 commodities markets, including coffee, soybean, wheat and beef markets.

As a result of this huge influx of Wall Street money, the food commodity markets are now 80% speculation, with the volume of financial transactions between 20 and 30 times as large as the real transactions. As Kaufman told Wired magazine, the direct consequence has been volatility two standard deviations above the 1990’s norm:

We’ve seen the price of food become more expensive than ever three times in five years [DQ: sparking food riots and revolutions throughout the developing world]. Normally we’d see three price spikes in a century. And part of the reason is this new kind of commodity speculation in food markets.

And now they plan to unleash the exact same speculative forces on water. As I wrote in a 2013 article, in many ways the commodification and financialization of H20 represents the final frontier of crony capitalism. If granted complete control over the pricing mechanism of this vital natural resource, banks and hedge funds will have the means, the power and no doubt the financial incentive to decide who gets to drink another day, and who doesn’t. By Don Quijones. An exclusive for Wolf Street.

Through crude use of statistics, the Spanish government makes a mockery out of tragedy. Read…. How Government Masks the Plight of Spain’s Lost Generation

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  14 comments for “Enron-ization of Water: Wall Street’s Pending Resource Grab

  1. Simon
    Aug 10, 2014 at 1:39 am

    The financialization of everything carries on at pace. They will not stop until they own everything. The water, the land and us slaves who toil for the masters of the universe.

    It remains to be seen whether we will fall into a passive domestication, only grumbling to ourselves as we chafe against our yolks, or if we realise that freedom is ours for the taking.

  2. Gil Obrero
    Aug 10, 2014 at 5:38 am

    And perfect opportunities to destroy and contaminate water supplies if the profits too low, and filthy bureaucrats to draft laws criminalizing using rain and corrupt corporations claiming they own the clouds and fines and charges for failing to pay rain tax every times it rains on your property.

    Well that would be as good a start as any as I am certain that the death toll amongst those trying to collect will mushroom, certainly will be my number one priority

  3. Haralambos
    Aug 10, 2014 at 8:40 am

    This is a 90-minute film based on the book _Blue Gold_.
    This is what we are facing: https://www.youtube.com/watch?v=B1a3tjqQiBI

    • steelhead
      Aug 10, 2014 at 12:37 pm

      Glad to see you commenting on a different site. I have missed your “Sandals on the Street” commentary. Hope things are going well for you and your wife.

      • Haralambos
        Aug 10, 2014 at 2:16 pm

        I will try to put one up tonight. Thanks.

    • Don Quijones
      Aug 10, 2014 at 3:07 pm

      Have just watched half of the film, Haralambos. It makes for compelling — and very scary — viewing. Thanks for the heads-up!

  4. Louis
    Aug 10, 2014 at 11:35 am

    Ridiculous and unaffordable housing prices are one thing—owning a home is not crucial to one’s survival—but unaffordable water is another story.

    I agree that water privatization will blow up in the faces of the buffoons who propose it—neither cities nor individuals are going to stand for being priced out of water.

  5. mike
    Aug 10, 2014 at 3:08 pm

    There is already a water market in Chile. So long as it’s a free market little can be wrong with it. The problem is when politicians get involved.

    • Don Quijones
      Aug 10, 2014 at 3:56 pm

      Interesting point, Mike. You might want to read this, though:

      http://www.theguardian.com/global-development/2013/apr/24/mining-logging-chile-without-water

    • Adam
      Aug 10, 2014 at 6:37 pm

      “So long as it’s a free market little can be wrong with it.”

      It DOES NOT mean I’m a commie or something worse when I say that this is total nonsense.

      When water falling from the sky and flowing down the mountainsides is “privatized” and declared a part of the “free market” lots of really bad things can and will happen. What if the “owner” of that water decides to “sell” that water to the farmers in a bordering country? (It’s HIS water, after all, and he has the RIGHT to sell that it to the person who will pay the most.) And … so what if the people in his own country DIE from lack of water?

      The too big to fail banks gambled with our money (the free market and “little can be wrong with it” don’t you know) and impoverished millions of Americans. And these too big to fail banks were bailed out by democratically elected representatives who don’t even listen to their constituents because 99% of their campaign funds come from from lobbyist practicing … drum roll … free speech.

      The free market does not mean that you play the baseball game without umpires.

  6. Miggy
    Aug 11, 2014 at 8:23 am

    Thanks a lot for the article. Very insightful.

    With weather modification now a reality and probably more pervasive than we know, futures contracts especially water are easily manipulated.

    Take the wheat farmer as an example. He sells his wheat now rather than in the future because he is not in business to gamble on the market for wheat in 6 months so he takes his profit now and somebody else buys the gamble, hense the futures contract.

    If water is run the same way with futures contracts with municipalities on the other side of that contract the owners of those futures contracts can be sure they, not municipalities, win. Especially with weather modification. Who cares what that does to the price of water.

  7. SRV
    Aug 11, 2014 at 10:55 am

    Great piece “Don”

    Wondering if Mr/Mrs Mainstreet is beginning to understand why our corporate friends have been on a 50 year denigration campaign of any and all government services, championed by the 100% captured GOP (as opposed to the 80% Dems)?

    Any publicly controlled service is unavailable for corporate manipulation for profit, and is therefore to be demonized and detractors ridiculed and demonised (as Liberal… or Communist… or un-American… or worse)… and if all else fails it’s time for the black ops!

    True around the world… but clearly perfected in America where at least half the population today would support complete anarchy, with corporations calling the shots on every aspect of daily life…. so why not water… make perfect sense!

  8. Matt R.
    Aug 11, 2014 at 11:31 am

    The water issues in the Western US are troublesome to say the least. Then again, were we really meant to have so many people living in deserts getting their water from somewhere else?

  9. Randy H
    Aug 11, 2014 at 3:42 pm

    Forgive me, but I didn’t even bother reading this. They just don’t need to be messing with our water; look what they’ve done to our markets.

Comments are closed.