Is Water the Next Oil?

Water-related investing is getting a lot of attention these days, but media reports focusing on the commodity as a scarce natural resource in danger of depletion may be misplaced. Instead, we believe opportunities exist in infrastructure related to water recovery, purification and delivery. This week we review the investment options available for advisors in this $400 billion global industry

The Environmental Protection Agency (EPA) estimates that the American water industry needs $500 billion of infrastructure investment over the next 20 years, providing both investors and private companies with new investment opportunities. According to Chris Brown, chief investment strategist and portfolio manager for Pax World Balanced Fund, many of America’s sewage systems were built during the 1950s and needs to be replaced. Globally, investments in infrastructure are already underway, including a Chinese plan designed in 2006 to build 200 miles of canals, taking take water from the Himalayas and bringing it to the Yellow River. According to Brown, China will spend about $120 billion on water infrastructure over the next few years.

Because many industries depend on clean water -- including agriculture, pharmaceuticals and electric power -- major companies have begun investing in water. In February, 2007, General Electric purchased Ionics, Inc., a water treatment company, for $1.3 billion. They also declared that they plan to reach $10 billion in water-business sales over the next 10 years.

In addition, there are investment opportunities in desalination technology, says the Christian Science Monitor. Major companies like General Electric have plans to open several desalination plants a year worldwide, each of which will cost up to $300 million. Although desalination is the most expensive way to produce clean water, it is an extremely effective technique, says Dan Brown, the CEO of Ionics, Inc. According to Brown, desalination “provides the ultimate answer for water-supply problems,” as its source is “effectively limitless.”

Growing Demand for Water

Although nearly 80% of the Earth is comprised of water, only 3% of it is fresh and accessible, says the Natural Resources Conservation Center. Of that 3%, only 1% is available for consumption. The remaining fresh-water supplies are frozen in glaciers, or divided among industry, agriculture and domestic uses. According to the United Nations, 20% of the supply is used by industry and 70% is used by agriculture, leaving only 10% for domestic use.

Over the past century, domestic demands for water have increased significantly (see Table 1). According to the Sustainable Asset Management group, fresh-water consumption has doubled since World War II. By 2030, the group estimates that fresh-water consumption will increase another 25%. Similarly, as the world population increases, more water is required. By 2050, the world’s population is predicted to increase from 6 billion to about 9 billion, says the United Nations. With this dramatic increase, the demand for water to feed and sustain the global population is estimated to double. At the same time, it is predicted that half of the population will live in “water-stressed” countries, where both quantity and quality of water will reach “economically crippling” levels.

Table 1: World Water Consumption

Source: UNESCO

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