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.
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