Looking for a way to trade the credit crisis? Boring! That’s so last year. Jump in and trade the water crisis. Over the last year, power-hungry politicians and lazy journalists (myself included) have been blaming greedy speculators for the dramatic rise in oil prices, and it’s just a matter of time until we start blaming them for rising water prices. I hope that happens sooner rather than later.
Yes folks, this looks like the easiest trade of the century. You’ve probably heard about the scarcity of clean water and the impending "water crisis," so I’ll only give a brief description of the problem: Just like oil, we have a finite amount of clean water. The world’s population is exploding and urbanization is on the rise, meaning that more water is needed for agriculture, sanitation and industrial processes. Paranoid environmentalists have been flooding the Internet with stories of a dark and not-too-distant future where global warming leads to desertification, where desertification leads to reduced clean water, forcing nations to go to war over water resources, and man’s appetite for self-destruction leads to the collapse of civilization.
But don’t worry. Speculators will save the day.
We have been wasting water because it’s so darn cheap, and market-based incentives are urgently needed to use water more intelligently. That’s where the speculators join the party – once their greed elevates the price of water, people won’t waste water, and money can be raised to develop water infrastructure. To borrow a phrase from Gordon Gecko, "Greed is Good."
For example, agriculture accounts for 70% of the world’s water use, and many farmers enjoy subsidized water. As a result they don’t have much incentive to use water more efficiently, and we all suffer. And cheap water undermines the need for investment in water assets, which means that water demand will increase faster than water supply. If you don’t have a market mechanism setting the prices, you have irrational pricing and environmental damage. Proper pricing will inspire proper water use.
Substitutes for water will make more sense as the price of the commodity rises. We might develop chemicals to use in our toilets instead of flushing water, or we will invest in technology to cost-effectively desalinate sea water. Nasty speculators manipulated oil prices, forcing us to use energy more efficiently and invest in substitutes like solar and wind power. Who knows what substitutes we would invent once speculators start manipulating water prices?
"Water is so under the radar that cheap doesn’t even begin to describe it," said Kevin Kerr, editor of MarketWatch’s Global Resources Trader. "But one day soon we will realize that it is one of the most important commodities and quickly becoming one of the scarcest."
If you’re looking for a way to trade this idea, look at PowerShares Water Resources (PHO – Last trade $21.95), an exchange traded fund that tracks the Palisades Water index.
Disclosure: I own some shares of PHO.