The coming resource wars
“Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist.” — Kenneth Boulding, author of “The Economics of the Coming Spaceship Earth”
One global power, the United States, and two regional powers, China and Russia, are making up plans — and adding to their armies — for future use that will have none of the political dogma that was a part of the past 100 years. The Middle East is a proving ground for crude oil, an essential energy source for the modern world regardless of what the Greens preach. The real test for survival will come as the world population continues to grow. Fresh water is already a growing global concern; and without plentiful water, food stocks will draw down.
It all comes down to numbers. What would you think if I made you this offer?
Come and work for me as a special consultant. I will write you a 30-day contract for you to work for me, and I will pay you one penny on your first day. Each day thereafter, I will double your salary. On Day 2 I will pay you 2 cents, and on Day 3 I will pay you 4 cents.
If you understand exponential growth (growth by a constant fraction of the growing quantity during a constant time period), you will expect such a contract to be fortuitous by its expiration. But even I was shocked at the numbers.
As your employer, the doubling and then the redoubling of your salary would be only $5.12 on the 10th day. By the 15th day, I would have to pay $164. But by the 20th day, the exponential growth of your salary would cost me $5,243. Finally, by the 30th and last day of our contract, I would owe you a check for $5,368,709 for eight hours of work.
Of course, long before the 30th day, our contract would be void. I’ve never had anything close to $5 million, and no banker would extend me such credit (especially if I made crazy deals like the one above). Somewhere around the 20th day, our agreement would hit critical mass — a point from which I could not fulfill my obligation.
The Earth’s population is also growing exponentially. While it is not doubling every day, it is doubling every 40 years. As this growth multiplies upon itself, the finite resources of the Earth are stretched so far that the last war fought by humankind will be over the same things the first war was fought over: water, shelter and food.
When my great-grandfather was born in 1851, there were roughly a billion people on the planet, double Earth’s population in 1500. That type of growth rate — a doubling every 350 years — was consistent with the rate of increase to humankind from the dawn of agriculture to beginning of the Industrial Revolution.
In a way my great-grandfather’s generation was the first of the baby boomers, for his was the first generation to be the leading wave of the first human population explosion.
When my grandfather Amil was born in 1881, the global population totaled 1.5 billion people. Between his birth and his father’s birth 30 years before, the world had added half-again as many souls.
When my father was only 13, in 1925, Earth’s population was 2 billion. By 1976, when I was in high school, it had doubled to 4 billion. The current population is more than 7 billion. By 2050, the world population is predicted to stand at 9.5 billion.
Last summer, Real Clear World put these numbers in context:
That’s 35 percent more than today’s 7 billion — the equivalent of adding a new Africa and China to the world in just over a single generation. And the demand for added resources will actually rise more than 35 percent, because the 4 billion people presently surviving on the equivalent of $5 a day or less won’t be content to live at subsistence level for the rest of their lives. Lifting them up will take more — much more — of everything, as the average person living in the industrialized world today consumes or uses 40,000 pounds each year of metals, from aluminum to zinc, and more than 70 elements in between.
I have spoken with agronomists who say that in order to support population increases, the word will have to quadruple its agriculture production and increase its energy output by a factor of eight.
Some 160 years after the Industrial Revolution commenced, man is drinking dry the Earth’s wellspring. The end result could be the collapse of civilization and loss of civil liberties.
Global populations could be so greatly reduced that the nation state may find an excuse to use sweeping powers. Society could eventually revert to the breakdown that prevailed during the Dark Ages, where fundamentalist religions and local despots dominated human existence.
Yours in good times and bad,
Is Water A Right, Commodity, Or Service?
Is water a commodity, a service, or a right? Recently, the debate has raged.
Daniel Van Abs, a water policy professor at Rutgers University, raised that question in a recent editorial published in NJ Spotlight. Van Abs is a water policy professor at Rutgers University who served as senior director for planning and science with the New Jersey Highlands Council, a water-protection implementation body. He has since retired from state government.
Van Abs posed this question in his post: “Is water, as the U.N. states, a fundamental human right? Or is it a commodity that must be purchased at the going rate? Or is it a public service, in which the focus is on satisfying a social goal for provision of general needs?”
“Our history shows us that water supply has aspects of all three, which makes for a muddled policy setting. What do we do when basic water services exceed a customer’s ability to pay? As water rates rise to address the costs of system rehabilitation, enhanced drinking-water treatment, and source-water protection, we need to make sense of this mess,” he continued.
Detroit officials sparked protests last year by shutting off water service for thousands of delinquent customers, a move that prompted questions about whether shutoffs violate human rights. “The city, which continues to close as many as 400 accounts a day, has been widely criticized for its actions,” CBS News reported. United Nations advisers have argued that Detroit violated human rights during a frenzy of water shutoffs.
Cities other than Detroit have also used water shutoffs to handle ratepayer delinquency. “In Michigan, Hamtramck, Warren, Pontiac, Eastpointe, Romulus and other cities have shut off delinquent customers as a way to improve collections. Elsewhere, so have other big cities such as Baltimore and St. Louis,” the Detroit Free Press reported.
Van Abs noted that New Jersey is no stranger to ratepayer delinquency. “New Jersey has areas of high poverty that have lost most of their industrial water customers. And much of the state’s water-supply infrastructure is old, if not decrepit,” he wrote.
To Van Abs, there are problems with calling water a guaranteed public service. “The costs could be handled like many other public services (such as police or courts), through the property tax, with local governments paying the water utility to provide the service. Doing so would remove incentives for efficient water use, unless provisions are made to limit the service by household to only what is necessary. Just imagine the problems with this approach. Government would have to track the number of people per household to ensure that a single-person household and a five-person household are provided for equitably,” he said.
There are also problems with calling water a commodity, since it means water shutoffs if customers cannot pay. “Clearly, this approach is not socially acceptable for those of limited means,” Van Abs writes.
What if water were treated as a basic human right? For utilities to be empowered to treat service as such, policy changes would be needed in many places, including New Jersey.
“The problem is that New Jersey has no routine system for helping poor households afford water (and sewer) services. For residential energy, the NJ Board of Public Utilities regulates essentially all providers, and New Jersey has established several programs for temporary and long-term assistance. The same is not true of water supply utilities, since there are hundreds of government and privately owned water utilities in New Jersey. Establishing a unique household assistance program in each of these utilities would be an administrative nightmare, and some are too small or serve too poor an area to provide this aid,” Van Abs wrote.
“A broader approach is needed. New Jersey needs to take a hard look at how its poorest households will maintain access to water utility services as water and sewer rates increase. We shouldn’t allow the Detroit question to become the New Jersey problem,” Van Abs wrote.
California Is Running Out Of Cheap Water
The ongoing water crisis in California has generated some dire predictions about the state’s future. But California isn’t running out of water. It’s running out of cheap water. The drought damage is estimated as $2.2 billion, which is significant, but hardly the “end of growth” for California’s $2.2 trillion economy. The problem for businesses, however, is that cheap water jeopardizes their water security. Executives need visibility into the issue and strategies to manage it, but unfortunately, the slow policy response and inconsistent price signals slow adaptation and innovation.
It starts with a very basic problem of ‘metrics’. How do we measure water? Since agriculture accounts for the majority of the water usage, around 80%, the attention naturally focuses on this sector. In the absence of good metrics, the conversation drifted to esoteric metrics such as “gallon per nut” (for almonds) to compare almonds and alfalfa. These two are the most frequently discussed crops; they occupy similar land acreage in the state. An acre of almonds consumes about 1,140 kgal of water per year while an acre of alfalfa consumes about 30% more. But there are real economic differences: Almonds generate about $6,000 of revenue per acre per year, compared to alfalfa’s $1,000. Therefore, the economic value of almonds is about $5.3 per kgal of water and alfalfa is only about $0.7 per kgal – almonds are eight times more valuable than alfalfa per unit of water.
There is even a more basic issue. Water is measured (and charged for) by volume. But the value of a gallon of water is highly dependent on location. In California, the difference is extreme. The typical difference in annual total rainfall between northern and southern California is fifty-fold – 100 and 2 inches, respectively. Clearly a gallon of water in the north has different value than the same gallon of water in the south, but how can this be quantified?
The most logical proxy to use to sort out the geographic and economic differences in the value of water is energy. There is no shortage in water for those who are willing to pay for the energy to treat, convey, distribute and collect it after use. This is why California is not running out of water. It already ran out of cheap water. But water needs to be regulated to make sure that withdrawal does not lead to depletion, and is priced in a way that captures the value of the energy and environmental externalities.
When we price water as energy, we gain visibility. The energy intensity of water in California can be as low as 2 kWh per kgal or as high as 37 kWh/kgal (including desalination and conveyance). Assuming an electricity price of $0.15/kWh (to create a “value of water” benchmark), the energy price of water will range between about $0.3 per kgal and $6 per kgal. Almond farmers can easily pay for the low-end (which is less than 10% of resulting crop value), which is what they have been doing until recently. They cannot pay for the high end. Alfalfa farmers can pay for neither, and the popularity of the crop in the state depends on the fact that the state’s byzantine system of water rights means that water can be virtually free for some agricultural users. In some locations, however, today’s drought prices are as much as $3 per kgal and driving an outcry among farmers. In the absence of clear and consistent water pricing, econometrics that use energy as a proxy can provide decision makers with visibility into the value of water.
This analysis highlights the challenges California faces in deploying what should be its greatest asset in addressing water issues: innovation. The lack of clear pricing has led to a lack of interest by Silicon Valley entrepreneurs and investors. New pricing mechanisms and regulations may change this situation, but the track record of government is not encouraging. Last year, finally, the governor signed a bill to regulate groundwater extraction – but the regulation is set to be fully implemented only in 2040, and until then, farmers that have the money to drill deeper for water can suck aquifers dry, while regulators that focus on the residential sector, may move some guilt, but California residents cannot conserve their way out of the crisis.
The Israeli experience may be relevant. From the water perspective, Israel is like a “miniature California”: It is 60% desert, had a seven-year drought between 2004 and 2010 and the driest winter on record in 2013-2014. It has one big surface water reservoir (the Sea of Galilee) and ground water aquifers that need to be protected, and relies on desalination plants for additional water. Fresh water is expensive, so farmers minimize use and when possible use brackish water. Even so, agriculture is 2.4% of GDP (compared to 2% in California) – Israel even exports carrots to Russia. Like California, it’s an entrepreneurial hub, and there the price of water helps drive thriving water innovation: Promising start-ups include Desalitech, which builds improved reverse osmosis systems that farmers can use.
How should business executives respond to the water crisis? They cannot wait for policy makers. They have to acquire the right data and determine the internal value of water to decide what technology can be effective where. For example, Nestlé uses an internal ‘shadow price’ of water to assess innovations and proposals for new equipment.
As California runs out of cheap water, and as the regulators are moving too slowly, companies have to distill complex information into crisp decisions. They should use data and analytics to determine the value of water, using the energetic price as a starting point. This will boost innovation and select the innovations that can provide value.