The new oil?

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Senior Associate Dean Bhaskar Chakravorti interviews Professor Richard Vogel, Chair of the Water: Systems, Science and Society program and Professor of Civil and Environmental Engineering

 

 

 

Bhaskar Chakravorti: My old firm, McKinsey, issued a widely publicized report in 2009 pointing to a “water gap” primarily driven by four countries that collectively account for 40 percent of the world’s population and 30 percent of global GDP - China, India, South Africa and Brazil. Each has drastically different water issues and collectively will account for 42 percent of projected water demand in 2030. While McKinsey did identify potential approaches to addressing the gap, the solutions are far from straightforward. This does not even cover regions such as the Middle East and North Africa, which is arguably among the most water-constrained region in the world. The sharing of water among countries is an issue fraught with tension in many parts of the world. Access to the sources of water yields immense economic and political power. I think it is not an understatement to say that the availability of clean water is at the intersection of global business demographics, geopolitics, technology trends. It is essential to survival. Worldwide demand for it is growing, many sources of water are drying up and there isn’t a clear strategy for how manage the supply. Are we getting to the point where clean water is the new oil?

Richard Vogel: It’s a compelling question, because there are more similarities than there are differences. There are differences, but the similarities are profound, and they predominate.

The issue with water is that we can’t live without it. We could live without oil because it’s a substitutable resource, but we can’t live without the benefits of oil. I am currently working with the World Bank, on an evaluation of the proposed Rogun Dam in Tajikistan, which is a large dam where the primary purpose is to generate hydroelectricity. So there are situations where water can be a substitute for oil. On the other hand, there are over a billion people who lack access to clean water and there is no substitute for clean water. There are certainly similar issues with oil; in many parts of the world, it’s in short supply.

If you Google “water crisis,” you get about 180 million hits. This global “water crisis” is in some ways analogous to what we once viewed as an oil crisis, and now see as a much broader energy crisis.

According to the USAID global water crisis site, of the 48 countries experiencing chronic water shortages by 2025, 40 are either in the Middle East and North Africa or in Sub-Saharan Africa. The twenty countries in the Middle East and North Africa are the worst off. The worldwide demand for water tripled in the past century. And it is currently doubling roughly every twenty-one years. This is clearly unsustainable, and the places that will be hit hardest are places that are already having serious water shortages.

You think of water as being different from oil because it’s renewable, but there are a lot of places where water behaves like a non-renewable resource, just like oil. If you go to the Ogallala aquifer in the Great Plains of the U.S, or to the Great Plains of China, or to Venice, or to many places in India, you see land subsidence and other results of ground water pumping. There are places all over the world which draw groundwater in a non-sustainable way, analogous to the way in which oil is drawn from the ground.

Such groundwater reserves, often termed fossil aquifers, are not being replenished at a rate equal or greater than the rate of withdrawal. There are generally two types of water of concern: renewable and non-renewable water. The most compelling issue is that most of the non-renewable water is being consumed by agriculture. If you look worldwide, a very large fraction of agricultural water is non-renewable. And of course, food and water are linked. In the same way that oil is a commodity that generates so many other products, water is used in almost every process you can think of, including energy generation, and even including oil. Both oil and nuclear power plants require water for cooling.

As far as the differences between oil and water are concerned, there are quite a few. Water has a religious and a spiritual component. Water is also a human right. And most importantly, it’s a pre-requisite for our balance of life. There’s no substitute for water. Also, water can sometimes be a substitute for oil; hydro-electric power is a case in point.

BC: As you look around at the pricing of water in different regions of the world, is the pricing reflective of the market conditions? A water gap should raise prices according textbook economics, which would, in turn, force us to better manage our usage of water, innovate, etc. Yet the prices haven’t reflected the gap. What’s the reason for that?

RV: That’s a historical problem with water, because water is not like other assets. First of all, there’s no substitute for water. There are different needs and demands and sources of water, but there are no substitutes for the commodity. If you think about the places where water scarcity threats are greatest or those places with the least clean water per capita, you end up thinking about the billion or so people that don’t have access to clean water. The demand curve for water isn’t what you learned in your economics courses, because you simply must have a certain minimum quantity of water to survive and because people don’t always behave rationally when it come to water due perhaps to its aesthetic, religious and/or spiritual value. It’s a challenge to price it; the price - quantity relationship just doesn’t behave the way economists would like it to. Many people will argue that privatization of water is ideal, but there are limits as to how feasible this is. You would hope for a more efficient system, but there are limits to how flexible a resource water is, like the absolute minimum threshold of water needed for survival.

BC: So there are political constraints that prevent prices from acting as market signals?

RV: There are political constraints. There are all kinds of constraints with water because it is essential for life. That’s the real problem.