Willem Buiter thinks water will be bigger than oil | FT Alphaville

Willem Buiter thinks water will be bigger than oil

The folks at Citigroup are a thirsty bunch.

In a 37-page note on Thursday, the bank’s global strategists recommend investors play the urbanisation trend by buying into water companies (these ones to be specific), arguing that the concentration of the world’s population and increasing standards of life will drive up demand for the liquid commodity.

Even Willem Buiter, a man most often seen railing at the vagaries of central banks, gets stuck in, with a 4,000-word essay on the subject. Which means we could now discuss whether the Citigroup economist thinks water is a public good (he says it’s private), whether it’s excludable (i.e. lends itself to property rights — he says it does), whether it’s a merit good as defined by Richard Musgrave back in the 1950s (it’s not) and whether, since it is essential to life, it should be free (to which his answer is a curt ‘no’).

But instead, we’ll just skip to the bit where Buiter says water is the next big thing:

I expect to see in the near future a massive expansion of investment in the water sector, including the production of fresh, clean water from other sources (desalination, purification), storage, shipping and transportation of water. I expect to see pipeline networks that will exceed the capacity of those for oil and gas today.

I see fleets of water tankers (single-hulled!) and storage facilities that will dwarf those we currently have for oil, natural gas and LNG. I see new canal systems dug for water transportation, similar in ambition and scale to those currently in progress in China, linking the Yangtze River in the South to the Yellow River in the arid north.

I also hope and expect that these new canal ventures will be designed and implemented with a greater awareness of the environmental and social impact of such mega-projects. India will have to engage in investment on a scale comparable to that seen today in China to produce clean water in the best locations and transport it to where the household, industrial and agricultural users are.

Water as an Asset Class

I expect to see a globally integrated market for fresh water within 25 to 30 years. Once the spot markets for water are integrated, futures markets and other derivative water-based financial instruments — puts, calls, swaps — both exchange-traded and OTC will follow. There will be different grades and types of fresh water, just the way we have light sweet and heavy sour crude oil today. Water as an asset class will, in my view, become eventually the single most important physical-commodity based asset class, dwarfing oil, copper, agricultural commodities and precious metals.

Now, who needs a drink?

Related links:
Investors start to tap the vital commodity – FT
African land grab could lead to future water conflicts – New Scientist
Enhancing the efficiency of water supply – product market competition versus trade – CEPR paper