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August 1, 2009 @ 4:14 pm
Got Water? Wait Until 2025…

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We know that water is a requirement for life, but despite this fact we don’t treat it with the reverence one would expect. The reason lies in economics and even Adam Smith was confused. Smith, of course, is known as the father of modern economics but he puzzled over the “Diamond-Water Paradox.” Why was it, that diamonds with limited practical use (and no survival value) command much higher prices than water, a prerequisite for life? He suggested that the value was derived from labor. Finding, mining and processing a diamond was hard, time-consuming work and obtaining a drink of water was a relative cinch. While this was literally correct, the true answer can be explained using an economic concept called marginal utility.

In essence, it’s not the total inputs or usefulness of a good that determine its value. Rather, it is the satisfaction (“utility”) obtained by each additional quantity. Said differently, you may love pizza or beer but if you consume too much they can make you sick. The graph below illustrates this. Early on, each additional slice of pizza makes you much more satisfied (the steep part of the curve on the left side of the graph).


The degree of “diminishing marginal utility” for water is quite high because water is perceived to be always available so we assign an artificially low price to it. Once you quench your thirst with a glass or two of water it becomes less desirable. Thus, water’s marginal utility can be illustrated by the following curve.
Most wouldn’t realize that water is the 3rd largest business in the world behind oil & gas production and electricity generation – we just take it for granted because we assume clean, freshwater is abundant – it’s not. Planet Water: Investing in the World’s Most Valuable Resource cites the following statistics:

  • 1.1  billion people have no improved water
  • 2.6 billion have no proper means of sanitation
  • Half of all hospital beds are occupied by sufferers of waterborne and water-related diseases
  • 10 million person years are annually spent by women and children carrying water from a distance

Finally, freshwater accounts for only 2.5% of the world’s water resources. Of that amount, 79% is locked in icecaps/glaciers, 20% is underground and only 1% is accessible surface water. We have a limited and fixed supply of freshwater, yet demand is surging (sixfold in the past century) and per capita increases at the current rate would result in 90% utilization all freshwater globally by 2025…

Per capita consumption of water and the temporal and spatial constraints on water resources mean overutilization of freshwater supplies is virtually inevitable, particularly in developing countries. For instance, China is home to 22% of the world’s population but only 8% of its freshwater. Already, rapid industrialization has rendered 90% of China’s urban surface water too polluted for productive use. Similar water quality and quantity issues are manifesting themselves all over the world as we speak. India has only 1,600 m3 of freshwater vs. USA with 10,000 m3. Poor quality and insufficient quantities of water result in poverty, food shortages and disease while restricting economic development and ultimately leading to geopolitical conflict. 

Unfortunately, water has no substitutes. Its use is imperative for many industrial processes and safe drinking water is a bare necessity for life. Yet, given its finite supply, water must be used in an environmentally sustainable fashion. As an increasingly scarce commodity, its price must go up because every additional quantity will cost more to obtain. Already, price increases are guaranteed by the nature of water provision – it is a highly regulated activity with high infrastructure costs. Water rates have been held artificially low for a time but something has got to give. According to reports by the OECD and WHO, almost $16 TRILLION of water infrastructure investment is needed globally from 2008 to 2025. As a result, some are using a new term for water: “Liquid Gold.”   

Suppose the nickname Liquid Gold was literal in meaning. Those 64 ounces of water you’re supposed to drink every day would cost $60,000 at the current gold price of $955 an ounce. That’s $22.3 million per year or almost $1.8 billion during an 80 year lifespan. Only Warren Buffet, Bill Gates and some others on the annual Forbe’s rich list could afford that prospect. As a result, this is a virtually impossible outcome without rampant hyperinflation. Gold of course, is incredibly scarce – the World Gold Council estimated that just 158,000 tons had ever been mined by the end of 2006. According to Wikipedia, this volume would fit inside a 20 m3 box.

A better comparison can be made to oil, another scarce resource. So maybe “Clear Oil” is an appropriate nickname. Generally speaking oil is not used in its found state; it must be refined into useful fuels such as gasoline. By the same token, the overwhelming majority of water in the world is not potable. Freshwater must be treated or filtered artificially or naturally to remove impurities such as trace metals and harmful bacteria and saltwater must be desalinated. Ironically, oil refineries use enormous amounts of water and desalination plants use enormous amounts of energy. It’s no wonder that Middle Eastern nations ship most of their crude oil to be refined elsewhere and also operate a majority of the world’s desalination capacity.

To take the analogy a step further, I’m sure we all remember (but would like to forget) $4 gasoline in 2008. Well, the price of gasoline is derived$4-gas from the oil market whose participants assign a value based on future expectations and other contributing factors. The recent spike in prices was caused by the near universal belief in and fears of, “peak oil.” This was further exacerbated by the weakening dollar and inflation expectations. Dollar-priced commodities increase in nominal value when the relative value of the dollar decreases and oil is a traditional hedge against inflation.

Peak oil essentially means that the world has reached its maximum level of output – a fixed supply – whereas demand continues to increase. This imbalance requires ever higher prices until a market clearing equilibrium is met. For the time being, we have been saved by falling demand during the global recession. However, we are still racing to a “peak water” scenario. The water cycle on Earth serves to renew water resources, but it is a closed cycle so we have a fixed supply of water suitable to meet our needs.

Suppose “peak water” manifests itself in 2025 and for argument’s sake the foreseeable doomsday scenario results in water costing $4 per gallon (just like gasoline did). What would your water bill be (this analysis excludes sewer? Based on this article, a typical household of 4 people in the U.S. currently has the following scenario:

  • Average daily water consumption: 600 gallons
  • Average monthly water consumption: 18,000 gallons
  • Average rate per hundred cubic feet (HCF): $2.00
  • HCF: 18,000 divided by 748 (gallons per HCF) = 24
  • Average monthly water bill: $2.00 x 24 = $48

Now, apply $4 per gallon:

  • New HCF Rate: $4 x 748 gallons = $2,992
  • New Average monthly water bill: $2,992 x 24 = $71,808

Converting that figure into today’s dollars assuming 3% inflation = $44,750. Not exactly pocket change and I’m not predicting this will happen. Sometimes, a seemingly gross exaggeration is needed to prove a point. Much can be done to conserve water now so this nightmare scenario doesn’t come true. Simple behavioral changes and improved technology can make a big difference. Since I live an apartment and can’t replace my inefficient toilet I try to flush only a few times a day. In the U.S., maximum allowed flush volume has been 1.6 gallons since 1995, but older toilets can use much more water. My ‘80s era toilet probably uses around 3.5 gallons per flush and any toilets still in use from the ‘60s or ‘70s could be using 5.5 gallons per flush. Efficient toilets are readily available and produce significant water savings. Low flow shower heads and/or shorter showers help and obviously minimizing outdoor watering can provide major water savings as well. Below, I’ve compiled water usage figures for several common activities:

  • Toilet Flush: 1.6 gallons+ per flush
  • Shower: 2.5 gallons/minute, try this handy calculator to figure out water and energy usage and cost
  • Washing Machine: 18-25 gallons per load for Energy Star appliances (40 gallons for standard machine)
  • Dishwashing: 3-4 gallons by machine, 27 gallons by hand according to this study
  • Lawn Watering: 62 gallons for every 10 ft2 (30% of water used on East Coast and 60% of water used on West Coast according to the U.S. National Wildlife Federation)

faucet-bubbleWater usage can add up to many thousand gallons quickly and what this list ignores is all of the virtual water content inherent in the products we consume every day. According to this presentation, 1,500 gallons of water are needed to produce a hamburger, fries and a coke. All that paper we use? 3.4 trillion gallons of water per year! Clearly, there are ecological and financial benefits to be had by conserving water. Also, I want to thank my reader Phillip for sending me the above presentation and alerting me to the energy costs embedded in water usage. About 20% of total energy used in California goes toward pumping and processing water. Meanwhile, he noted, “every gallon of hot water consumes 0.147 KwH of electricity to heat.” Those extra long showers might provide less “utility” if we realized how much they cost.

Sources: Planet Water and Water is not a free good.

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One Response to “Got Water? Wait Until 2025…”

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