Wednesday, June 18, 2008

The Ultimate Shortage -> Water

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I get an email almost every week about my thoughts on water. As I've outlined since blog inception, I am a proponent of the Malthusian view that we are approaching the point in the coming decade(s) of too many humans on too little planet. A must read if you weren't reading the blog in March [Mar 24: WSJ - New Limits to Growth Revive Malthusian Fears] My version of this is simply stated as a "World of Shortages".

Now I do believe technological innovation will help curtail some of the issues, but it will be like a trout swimming upstream. And as I've outlined since early in the blog life is, the ultimate shortage will be fresh water. We are already seeing a lot of US specific issues both in the West and more recently in the Southeast. I do believe, in a generation or so, the wars will be fought over water as opposed to oil (err, weapons of mass destruction... err, to bring democracy to the good people of Iraq). At their core humans are really not much different than their ancestors - the inbred quest for territory and resources shall continue, only this time it will be exaggerated by necessity. Now that sounds like an outlier view, and I truly hope I am wrong on this one.

But as for investments - well water is a lot like wind - very limited investment arenas and most are "slow money". But we're starting to hear the drumbeat, and I caught two stories this past week - one the cover story of BusinessWeek (who else but Boone Pickens who is also delving into wind power in a huge way, after becoming rich off oil mind you) along with a story in the Toronto Globe & Mail. Let's take a look shall we?

**BusinessWeek
  • Roberts County is a neat square in a remote corner of the Texas Panhandle... The county encompasses 924 square miles and is home to fewer than 900 people. One of them is T. Boone Pickens, the oilman and corporate raider, who first bought some property here in 1971 to hunt quail. He's now the largest landowner in the county: His Mesa Vista ranch sprawls across some 68,000 acres. Pickens has also bought up the rights to a considerable amount of water that lies below this part of the High Plains in a vast aquifer that came into existence millions of years ago.
  • If water is the new oil, T. Boone Pickens is a modern-day John D. Rockefeller. Pickens owns more water than any other individual in the U.S. and is looking to control even more. He hopes to sell the water he already has, some 65 billion gallons a year, to Dallas, transporting it over 250 miles, 11 counties, and about 650 tracts of private property. The electricity generated by an enormous wind farm he is setting up in the Panhandle would also flow along that corridor.
  • As far as Pickens is concerned, he could be selling wind, water, natural gas, or uranium; it's all a matter of supply and demand. "There are people who will buy the water when they need it. And the people who have the water want to sell it. That's the blood, guts, and feathers of the thing," he says.
  • In the coming decades, as growing numbers of people live in urban areas and climate change makes some regions much more prone to drought, water—or what many are calling "blue gold"—will become an increasingly scarce resource.
  • By 2030 nearly half of the world's population will inhabit areas with severe water stress, according to the Organization for Economic Cooperation & Development.
  • The rush to control water resources is gathering speed around the planet.
  • "The idea that water can be sold for private gain is still considered unconscionable by many," says James M. Olson, one of America's preeminent attorneys specializing in water- and land-use law. "But the scarcity of water and the extraordinary profits that can be made may overwhelm ordinary public sensibilities."
(it's a long story from there if you are interested - specific to Boone Pickens history and his master plan)

**Toronto Globe & Mail
  • Looking to jump into an investment in a scarce resource with lots of upside potential? There's a clear case to be made for water.
  • water has much the same imbalance between supply and demand as traditional resources. The investment dealer Goldman Sachs recently described water as the “the petroleum for the next century.”
  • The one certainty is that water stocks haven't yet enjoyed anywhere near the rally that energy, metal and fertilizer stocks have.
  • The basic argument for investing in water is scarcity, starting with the fact that just 2.5 per cent of the world's water is fresh. Goldman Sachs says consumption of fresh water is doubling every 20 years. The World Water Council says about 1.1 billion people lack access to clean drinking water, and 2.6 billion lack adequate sanitation.
  • Here in North America, the council says we use about 350 litres of water a day per capita in residential areas, compared with 200 litres in Europe and 10 to 20 litres in sub-Saharan Africa. (sort of like oil, eh?)
  • Meanwhile, the North American water infrastructure is decaying. The American Water Works Association says much of the water network in the United States will need to be replaced in the next 30 years, and the estimated cost of replacing old pipes comes in between $280-billion (U.S.) and $400-billion. (instead we borrow $160 billion from the Chinese to send to you, so you can put it into your gasoline tank and call it a stimulus plan - instead of putting people to work on infrastructure projects.... but I digress)
  • One thousand litres of water are needed to produce a kilogram of wheat, while an equivalent amount of beef requires 13,000 litres. (so as the global demand for wheats, corn, biofuels, meat products rise... so does the need for water)
  • But while water ETFs have done well lately, it's probably not wise to invest in them with a quick score in mind. “It's more of a long-term theme, separate from the other commodities.”
  • Companies in the water business can be broken down into the following sectors: utilities, which are regulated suppliers of water to homes and business; treatment, which focuses on producing clean, drinkable water; distribution, which refers to companies that supply pipes, pumps and valves; monitoring, or water analysis; and resource management, which includes consulting and engineering firms that specialize in water projects.
  • Several stocks can be found in most of the various water funds and ETFs, including Veolia Environmental, a French conglomerate that gets about one-third of its revenue from water treatment. Veolia was mentioned in a recent Forbes magazine column by Ken Fisher that was headlined: “A stock for eco-nuts; If you are a greenie, buy Veolia Environment. If you aren't, buy it anyway.” Other water stalwarts include Itron Inc., which supplies water meters, and Danaher, a diversified U.S. industrial firm with expertise in water purification.

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