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Water is Now Being Traded as a Commodity Amid Fear of Scarcity

by Nikita Shukla Americas Aug 6th 20213 mins
Water is Now Being Traded as a Commodity Amid Fear of Scarcity

Water has joined gold, oil and other commodities that are traded on Wall Street, as worries about the uncertainty of its availability in the future rises. The US’s water trade market, the first of its kind, was launched on the Chicago Mercantile Exchange with $1.1 billion in contracts tied to California water prices. This market has allowed farmers, hedge funds, and municipalities to hedge against future water availability in California. The new scheme was announced in October 2020, triggered by the region’s severe heat, wildfire and droughts. While this could clear up uncertainty around water prices, treating water as a tradable commodity puts basic human rights in the hands of financial institutions and investors. 

Water scarcity has already impacted every continent, and an increasing number of regions are reaching the limit at which they can provide water services sustainably, especially in arid regions. With nearly two-thirds of the world’s population predicted to face water shortages by 2025, water scarcity is a growing risk around the world, as climate change and human activities are leading to severe droughts around the world. 

Water Scarcity in California

In California, 82% of the state’s population lives in drought, with 18% more in abnormally dry areas. The longest drought since 2000 lasted for 376 weeks, beginning on December 27 2011 until March 5, 2019. Californian Governor Jerry Brown announced mandatory water restrictions for the first time back in 2015. 

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The state relies heavily on snowpack in winter to resupply surface water streams and lakes. However, because of lack of winter storms and record high temperatures in winter, snowpack has been at an all-time low, threatening hydropower supply as well. When surface water supplies are low, groundwater is drilled to make up for the shortfall. However, these aquifers are being rapidly depleted to make up for the shortfalls in surface water supply. 85% of Californians depend on groundwater for at least part of their drinking water, which sank up to 60cm during the recent drought. Once these aquifers are depleted, California will have no backup supplies of surface water and while desalination could make up for some of the difference, it is expensive and energy-intensive. California currently operates 11 desalination plants, with 10 more proposed.

Furthermore, with California’s wildfires worsening year by year due to climate change, serious challenges to water management can be expected. Soils burned severely can lose the ability to absorb water for a few years after being burned. The 2020 wildfire season saw over 4.2 million acres burnt by nearly 10 000 fires, a record in California’s modern history. When rain falls on burnt slopes, the runoff can erode soils, transporting them into the river, threatening drinking water quality. There are also costly impacts to water supply and hydropower infrastructure due to increasing sediments and debris. 

The Rise of Water Trade

Therefore, considering the growing threats to its future availability, the trade of water futures has begun. A future contract like this is an agreement to buy or sell an asset, like water, at a specific time in the future at an agreed upon price. The futures will allow market participants to see what everybody’s “best guess” is with regards to water prices in California six months from now, allowing for flexible risk management and agriculture decision making.

However, treating water as a commodity and leaving this basic human right in the hands of investors and financial institutions would bring its own perils. Privatising water would “guarantee corporate profits to private companies; something which is incompatible with protecting the environment and ensuring universal access to quality service” as argued by water activist, David Hall. Looking at past examples of when water was left in the hands of corporations, such as in Guinea, privatised in 1989, saw water prices rise nearly seven-fold, significantly higher than that of their neighbours, as government subsidies faded. The troubles Guinea experienced highlighted a major issue in water privatisation – whereby private suppliers could sacrifice the welfare of water consumers; treating water as an economic commodity instead of a basic human right. 

As said by Pedro Arrojo-Agudo, a special rapporteur on human rights to safe drinking water and sanitation, “You can’t put a value on water as you do with other commodities’ trade … [it] has a set of vital values for our society that the market logic does not recognise and therefore, cannot manage adequately, let alone in a financial space so prone to speculation”. 



About the Author

Nikita Shukla

Nikita is currently an undergraduate student studying Economics at the University of Edinburgh. She is particularly interested in understanding the social impact of policy and achieving sustainable economic growth.

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