Commodities: Water should be traded on financial markets to avoid global crisis

By Andrew Critchlow

Britain, as the rest of the world, is facing a water crisis, leading some experts to predict that by the end of the decade H2O will be traded on financial markets like other finite commodities such as crude oil, or iron ore.

Although the Environment Agency says the past six months have been the wettest on record, summer hosepipe bans remain a possibility, partly because of historic inconsistencies in infrastructure investment. However, changing weather patterns and rising demand for water resources spell a potentially more nightmarish scenario within the next 20 years.

Britain is not alone in facing what could become a catastrophic deficit in fresh water. Unless radical steps are taken to ensure the global economy has enough water to meet all our needs then draconian measures such as rationing cannot be ruled out in the future.

Globally, the problem of water scarcity is growing at an alarming rate. By 2050, experts predict a 55pc increase in the amount of water required to meet demand from rising populations, food production and industry. To avoid serious shortfalls the world will need to invest an estimated $1.8 trillion (£1.05 trillion) over the next 20 years that could ultimately deliver $3  trillion in benefits for the global economy, according to estimates by the United Nations.

Markets can play an important role in providing future water security. 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.

Traditionally, the main concerns surrounding water resources have focused on rapidly developing regions in Africa, Asia and the Middle East but supplies in developed nations such as the US and UK are now coming under similar stresses.

The World Economic Forum has warned: “The future security of fresh-water resources around the world is of increasing concern. Because of our interlinked global economy, water scarcity in many parts of the world could harm the global economy in ways we hadn’t thought of. Shortfalls in crop yields and more variable food prices could be an early impact.”

“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.

As the draw on natural water supplies from industry and agriculture intensifies then the amount of clean drinkable water that will need to be produced by sea-water desalination will increase exponentially, further pushing up the cost. In such a scenario, the creation of a futures market for water would work more effectively than government-controlled regulators such as Ofwat to protect consumers and prevent the formation of pricing cartels dominated by countries and regions that have a surplus of water resources.

The fear is that water scarcity could eventually see water-rich countries form into a group similar to the Organisation of Petroleum Exporting Countries (Opec) even though water isn’t a commodity that can be easily traded across borders at this point.

“Water will become a commodity – but a very different commodity because it is also a basic human need. If you track economic growth and you agree that water is a vital input then it will eventually become a commodity,” said Rao-Monari. Set up in March this year, Global Water Development Partners is aiming to provide investment for water projects around the world.

“Although people are realising that water is a finite resource, they are reluctant to put a price on it,” Rao-Monari observed. “We need to get real money – large money – into this sector otherwise we’re going to hit a wall.”