are many things in life that we take for granted. We
expect to turn on a switch and the lights to go on.
When we turn on the faucet, we expect water to flow.
Whenever we are hungry, we expect the grocery shelves
to be stocked and we expect to be able to fill our tank
with gas whenever it needs filling. These things we
take for granted are lifes necessities. Our lives
need food, water, and energy to function. We expect
them to be there and we give them very little thought
until we have difficulty getting them. Occasionally,
Mother Nature reminds us just how precious these natural
resources are. Standing in line to fill your tank after
a storm has shut down energy production in the Gulf
of Mexico, walking into a grocery store to find stock
shelves empty ahead of a hurricane, or securing water
rights for farm land or a city in the midst of a drought
are subtle reminders of just how precious these resources
For the last two decades the U.S. and the rest of the
world have invested very little to develop and secure
these necessities that are so casually taken for granted.
Energy, water, base metals forests and farmland have
all been ignored by the financial markets. Bull markets
run in cycles lasting 20-25 years. They are the product
of supply and demand imbalances. The declining prices
that accompany bear markets lead to a scarcity of new
investment. Capacity shrinks, the industry consolidates
and new investment dries up leading to decline. In the
last two decades no new refineries have been built,
very little has been spent on building new pipelines
or power plants, building new mines, developing new
cocoa or sugar plantations, or developing water infrastructures.
Productive equipment in these areas have gone into disrepair,
deteriorated or been cannibalized, scrapped, or shut
down. The mining and energy industries are suffering
from a shortage of qualified geologists and engineers.
Who wanted to go to college and study geology when there
were fortunes to be made on Wall Street or in Silicon
Valley? The natural resource industry is suffering from
a dearth of qualified personnel.
As a result of this lack of investment, we face shortages
in several key commodities. The balance between supply
and demand is out of whack again and it will take more
than a decade to fix it. Inventory levels of major commodities
are down across the board. Gold and silver are running
multi-decade deficits, oil and gas are getting harder
to find and water tables around the globe are dropping
dramatically. We seldom think about these necessities
unless prices suddenly spike. While energy and the sky-high
price of oil and gas has captured headlines, water will
shortly move front and center as the cost of procuring
it becomes more difficult and our existing water infrastructure
breaks down. As we begin this new century, a global
water crisis could threaten the security, stability
and the environmental sustainability of the developed
and developing world. The looming water crisis will
affect all nations. Without an adequate supply of clean
fresh water, human development is stifled.
The fact that this crisis is upon us is made clear
by recent headlines from floods in Bangladesh and eastern
Europe, the water drawdown in the western United States,
to the hundreds killed by Nile fever. According to a
recent UN report, 25,000 people are still dying from
malnutrition every day and 6,000 people, mainly children
under the age of five, are dying from water-related
diseases. The problem is the worlds population
is getting larger and with it water withdrawals are
increasing with it. Water stress will increase significantly
in 60% of the world, especially in Africa, Asia, and
Latin America according to the UN.
The crisis in water centers around three factors. They
are listed below:
To understand the water crisis one needs to understand
the water cycle. Water is a renewable resource within
certain limits. The variability of water is one of the
essential characteristics of this natural resource.
The unpredictability and variability of water resource
flows requires management.
Most of the fresh drinking water required for human
consumption comes from precipitation. The water from
this precipitation is either absorbed by plants and
soil or returned to the atmosphere through evapotranspiration.
Most water consumed by humans comes from runoff water
that has been diverted for use in agriculture, industry,
or consumer use. The water that comes from evapotranspiration
supports forests and grazing land and various ecosystems.
The UN estimates that 26% of annual evapotranspiration
and 54% of accessible runoff is now appropriated by
humans. Because of growing population and increased
usage due to lifestyles, more and more water is being
appropriated. The result is that the water needed for
consumption, the production of food and industrial use
is becoming scarce.
"It has been estimated that today
more than 2 billion people are affected by water shortages
in over forty countries: 1.1 billion do not have sufficient
drinking water and 2.4 billion have no provision for
sanitation (WHO/UNICEF, 2000). The outcome can mean
increases in disease, poorer food security, conflicts
between different users and limitations on many livelihood
and productive activities. Current predictions are that
by 2050 at least one in four people is likely to live
in countries affected by chronic or recurring shortages
of fresh water
This is worrying given predictions
of a 60% world urban population by 2020. At present,
half the population of developing countries lives in
accretion of arable land through urban development has
led to greater appropriation of evapotranspiration moisture.
This growing urbanization is leading to the destruction
of ecosystems that support the growing of food and the
water necessary to grow it. It is also leading to increased
political tension, since many water resource areas are
shared by two or more countries.
The second key area affecting water is quality. Human
and industrial waste, chemicals, fertilizers and pesticides
are polluting our fresh water resources found in ground
water, lakes, streams, and rivers. Faecal coliforms,
acidifying substances from mines, metals from industry,
nitrates and phosphates from farming are finding their
way into our water supply. The pollution of water resources
is especially bad in developing countries, which lack
the economic means to manage their water resources.
Pollution is affecting the quality of water as well
as industries associated with water such as fishing
In the last decade close to 700,000 people died in
water-related disasters. Most of these water-related
calamities were in the developing world where there
are large population concentrations along floodplains
and the coast. Infrastructures are destroyed with each
new storm and without adequate financial resources,
they seldom are rebuilt or repaired. This leaves the
community more vulnerable to the next disaster. Floods
are the most common form of disaster with over 150 flood
events in 2000. Sometimes, as in the case with Bangladesh,
a water-related adversity brings about a concerted effort
to change and become prepared.
Factors Affecting Water
These three water-related issues are impacted by myriad
factors with population growth appearing at the top
of the list. There are 3 billion more people that inhabit
the earth than in 1970. Since 1970, water supplies have
decreased by one-third. By mid-century population growth
is expected to stabilize around 9.3 billion, 50 percent
higher than where it is today. Based on these projections,
nearly 7 billion people will live in water-scarce regions
in the world by the year 2050.
Closely associated with population growth
is increased demand coming from agriculture, urbanization,
industrialization and energy. All of these factors are
placing stress on the worlds water ecosystem.
These issues were addressed recently at the World Water
Forum in the Hague in March of 2000. The Hague Ministerial
Declaration identified seven challenges for the global
community to confront in this new century. They include
Meeting basic needs: This means recognizing
safe and sufficient water sanitation as a basic
Securing the food supply: enhancing food
security through efficient mobilization and use
Protecting ecosystems: ensuring ecosystem
integrity through water resource management.
Managing risks: providing security from floods,
drought and pollution.
Sharing water resources: promoting peaceful
cooperation between different water uses, and between
Valuing water: managing water and taking
into consideration economic, social and cultural
values, with a realistic pricing of water services
and their cost.
Governing water wisely: ensuring good governance
at both the private and public sector.
Because of its importance as a natural resource, water
has been given a high profile by governments, international
organizations, and NGOs around the globe. In addition
to these problems governments are wrestling with the
challenges of growing urbanization as well as the needs
of industry for clean fresh water. Water is not only
vital to maintaining city life, but it also plays an
important role in the production of food and energy.
The World Bank has recently drafted a plan to combat
water scarcity, linking it to poverty. Building water
infrastructures is expensive. Most water investments
entail large-scale infrastructure investments that are
risky and expensive. The costs to build these infrastructures,
such as dams, can be enormous with uncertain rates of
return and long payback periods. But without these large
scale investments, future water supplies would remain
in jeopardy. How these infrastructure investments will
be financed is emerging as one of the key policy issues
of this new century.
What is becoming clear to government leaders is that
the longer water quality and scarcity issues are unaddressed,
the greater the danger of a water crisis this new century
is going to see; a crisis that will be much more difficult
to cope with and much more complex than the current
energy crisis. These crises will beset us through frequent
heat waves, droughts, storms, floods and changing precipitation
patterns. Frequent and stronger El Ninos seem to be
accompanying warming trends throughout the globe. As
temperatures warm, water is sucked out of the soil at
elevated evaporation rates. This leaves less moisture
in the soil affecting groundwater, rivers, and crop
We live in a world of finite resources. There isnt
much we can do to alter the actual quantity of water
in the earth. The supply of water is essentially fixed.
What can be done with this fixed supply is that its
location and quality can be altered. Our access to fresh
water is a product of intervention through dams, storage,
and diversions. Because most of us live in cities, what
happens in one part of the country may affect other
parts of the country. A drought in water-short California
impacts crop prices for fruits and vegetables nationally.
Draining the Florida Everglades has meant less rainfall
for Miami. The large Ataturk Dam affects the supply
of water in Syria and Iraq.
it comes to water, there are no alternatives. Water
is as much a political resource as it is a natural resource.
Between nations it is a question of who controls it.
The question of ownership and rights has provoked countless
disputes, conflicts and wars throughout all of history.
Water was a factor igniting the Six Day War of 1967.
The Arab League became angered after Israels construction
of its National Water Carrier appropriated much of the
water of the Jordan River for use in Israel. Today a
bitter quarrel is emerging between Turkey and its nearby
neighbors, Syria and Iraq, over the flow of water from
the Tigris and Euphrates rivers. The Southwest Anatolia
Project, a major engineering feat, will place 22 large
dams and reservoirs along the Tigris and Euphrates rivers
at the top of their source in Turkey. Turkey in essence
will control the flow of water along these historic
rivers impacting Syria and Iraq. The Euphrates is Syrias
primary source of water. What is left over goes to Iraq.
There is no formal agreement between the three states
to share the water.
While oil dominates Middle East politics, water may
soon displace energy as the most important resource
in the region. It isnt just the West Bank, which
sits on top of a water aquifer or the Ataturk Dam. Most
of the worlds major rivers are the subject of
disputes or the source of political conflict. In Africa
the Nile River region is becoming the source of potential
conflict and war. Over two-thirds of the African population
is threatened by water scarcity and famine. The countries
that border the Nile--Ethiopia, Eritrea, Burundi, Rwanda,
Zaire, Kenya, Tanzania, Uganda, Sudan and Egypt--are
among the worlds least developed economies that
are poor and growing with enormous debt loads. They
are primarily agricultural economies dependent on the
water from the Nile. Their countries are afflicted by
soil erosion, drought and land degradation. Many of
these countries are the recipients of foreign aid. These
are poor countries without the resources to effectively
manage their water resources. Without the funds necessary
to build water infrastructures, the only option seems
to be war or genocide.
What is clear from headlines and developing stories
in the resource sector is that water is moving to center
stage as an apparent water crisis confronts the world.
Unless it is addressed soon, this crisis may affect
the stability and sustainability of all nations, especially
in the developing world. We all share and inhabit the
same planet and water affects us all. Millions die each
year from water-related diseases or from lack of adequate
and clean water. Millions more will die without access
to safe and clean drinking water. As population growth
continues and more people are added to the planet, the
water issue can no longer be ignored. It is going to
take people, peace and enormous resources to solve this
crisis. It will take more than the efforts of politicians
and diplomats. It will require cooperation globally
and enormous amounts of capital. From a private sector
viewpoint, it is an awakening opportunity still in its
How big is the global water market? It is much bigger
than anybody thinks. Even though the global water market
remains fragmented and in the hands of government, there
are estimates as to its size. Global Water Intelligence
in the U.K. has estimated its size ranging from $460-$620
GWI estimates per capita residential water use at about
15,000 gallons a year with an average price of $0.54
per cubic meter. Their estimates allow for a 10-15%
margin of error. The total global water market is made
up of residential use, waste water, industrial water,
and agricultural use.
Investment in water is a global opportunity. It isnt
just the U.S. market with the highest per capita use
of water. Opportunities abound from China to Brazil.
There is an enormous need for water investments globally
from water utilities to supply and support water use
in major metropolitan areas to water treatment, equipment,
and filtration companies.
In the U.S. there are more than 50,000 community water
systems. Most water systems serve communities of less
than 3,300 people. They are small, inefficient and there
are too many systems. Most water systems are owned and
controlled by government with less than 1% of the systems
serving populations of 100,000 or more.
Water is the only utility that hasnt been deregulated.
There are high barriers to entry, requiring economies
of scale and large capital investments. Demand continues
to increase as supply remains finite. No substitutes
exist as demand remains inelastic. The EPA has recommended
that it would require $151 billion in new investment
to bring the nations water systems to standard.
Where will this money come from? Most of the revenues
remain in government hands. The water sector is so small
that very few analysts on Wall Street even follow the
sector. Value Line covers the water utility sector with
coverage of only three water utilities. They cover only
a few of the filter and water treatment companies. The
group as a whole remains underowned and ignored by investors.
Water is hardly on the radar screens of most analysts
and investors. But it should be. A water index made
up of 20 U.S. and international water stocks is up over
45% since the beginning of 2001 versus losses for the
major U.S. stock indexes. Those returns dont include
dividends, which are high by comparison to other sectors
The market cap for the sector is less than $30 billion.
Liquidity isnt the greatest and stock prices can
jump suddenly with the smallest amount of buying pressure.
However, prospects should improve over the next few
years as the market for water grows and the industry
consolidates. At present a "Pac Man" phase
is taking place throughout the whole industry. Investor-owned
utilities are buying municipal systems; large public
companies are buying smaller public companies; larger
European companies are buying out U.S. utilities, and
small private systems are being consolidated to achieve
greater economies of scale.
In my Perfect Financial Storm Series and more recently
in The Next Big Thing, I have highlighted water as one
of the most important sectors to be invested in this
new century. There is a reason. The worlds population
continues to grow and along with it the demand for water.
Water is a growth industry that is essential to our
wellbeing. In addition to supply, the need for water
treatment systems to provide clean and safe drinking
water is one of the biggest and forthcoming issues of
our day. New spending on sewer systems will become a
key growth driver in the years ahead. I believe water
is going to emerge, along with energy, as The Next Big
Thing. As the tables listed below point out, investing
in water has been highly profitable over the last 5
and 10 years on a total return basis and from an income
point of view. As the returns below illustrate, water
has become Blue Gold.
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