The battle for the Colorado River is a water warning to us all

This week, a nasty fight has exploded on the US political stage. This is not about congressional votes or presidential candidates. Instead, it revolves around something so mundane that it is often ignored: water.

On Tuesday, the seven states that use the Colorado River for hydration — Arizona, California, Colorado, Nevada, New Mexico, Utah and Wyoming — were supposed to agree a plan to cut their water usage. This comes after the region’s driest two decades in 1,200 years.

However, the group missed the deadline, due to bitter fights. Most notably, six states have created a joint proposal for water savings, which California is trying to veto. The federal government, which wants joint cuts equivalent to a third of the average river flow, may now impose an emergency reduction plan. However, California will almost certainly contest this in court. Cue more fighting, as river levels drop.

Investors should take note. In recent years, it has become painfully clear that shortages of key commodities, such as oil, lithium or corn, damage business. Unsurprisingly, investor interest in the pricing and supply of these commodities has soared.

By comparison, the question of water is oddly neglected. That is partly because the sector is less financialised (in other words, readily traded and hedged) than other commodities. Although the Chicago Mercantile Exchange launched water derivatives nearly three years ago, the market for these products is small.

The lack of attention also reflects a presumption in the west that water could and should always be readily available. Thus while the corporate world has scrambled to create accounting systems for carbon usage in recent years (via the Task Force on Climate-Related Financial Disclosures), it has only recently started developing ways to price water in corporate accounts.

However, this must — and will — change. After all, as the UN points out, “water scarcity is an increasing problem on every continent”, due to population growth and climate change. Or as Kamala Harris, the US vice-president, noted pithily in 2021: “For years there were wars fought over oil. In a short time there will be wars fought over water.”

Indeed it is already sparking cross-border strife. One oft-ignored detail about Russia’s invasion of Ukraine is the bitter dispute about the supply of water to Crimea from Ukrainian canals. “Water stress”, as the UN calls it, is also fuelling conflict within countries, particularly since many of them have water governance frameworks that are desperately outdated, if they exist at all.

The Colorado River is a case in point. The main regulations on water usage come via a treaty created in 1922. However, this was developed in an era when farmers were the main consumers of water, and makes no provisions at all for sprawling suburbs.

Moreover, since local land ownership generally comes with unlimited water usage rights, the current system is prone to arbitrage and abuse. As Nate Halverson, an investigative journalist, explains in a new documentary, The Grab, Middle Eastern investors have recently acquired land in places such as Arizona for water-intensive agriculture — which has sucked the wells of local farmers dry.

Wall Street investment groups, spotting an opportunity, are now also racing to buy land and access to water rights, thus benefiting from a resource which is rising rapidly in value.

Take the New York-based hedge fund Water Asset Management: its investor pitch notes that “scarce clean water is the resource defining this century, much like plentiful oil defined the last” — and argues that “water investing has historically acted as an effective hedge against inflation” because prices are set to keep rising.

The arrival of financial investors is not necessarily a bad thing. It could make the pricing of water more rational, if it starts to reflect the real level of supplies. It might also attract more capital for investment in innovation, such as desalination technologies or measures to reduce leakage and waste. This is badly needed since there has hitherto been far less investment in water-linked innovations than in renewable energy.

But, as the sorry story of California’s energy utilities show, financialisation can also come at a cost, in the form of price gouging and infrastructure cuts. And there are already signs of a rising political backlash against private investment in the region, with some officials in Colorado decrying the hedge funds as “vultures”.

What could make these issues doubly contentious, Halverson tells me, is that some of America’s national security officials suspect the US will eventually need to control the export of water-dense products — such as agricultural commodities — to reflect rising scarcity. Liquid protectionism looms.

To put it another way, what the Colorado River dispute shows is that a fight is looming about who should control this most precious and life-saving of commodities. Should it be private investors, the federal government or states? And what happens if they disagree?

Right now the answers are alarmingly unclear. Which is precisely why investors need to wake up and watch this fight. If nothing else, it is the first cloud in a much larger political storm.

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