Liquid Gold: The Economic and Environmental Implications of Water Scarcity

Over the last century, water usage has grown at double the rate of population growth. This increase has pushed many regions to the limit of their water services, at least sustainably. As Australians from the driest state on the driest continent, this probably doesn’t come as a shock. After all, it was only a few years ago that we witnessed millions of fish die in the Darling River. Scientists have blamed intensified agriculture, overuse of the Murray Darling Basin, flooding, and heat waves. Blame aside, the event caused a nauseating disaster that endangered the drinking water for communities up and down the river. In short, as Australian’s we get it.

But Australia is not the only region suffering. In the west of France, the French government have decided to build hundreds of reservoirs and fill them with groundwater reserves. The move, meant to help the country's drought-stricken farmers and winemakers, has outraged locals.

Source: Le Monde 2023

In Asia, India’s groundwater resources are in danger of depletion after the country failed to balance its agricultural and municipal needs. The world's most populous country is facing the harsh reality that having 17% of the world’s population with only 4% of the world's freshwater supplies is unsustainable.

Source: Reuters 2024

In South America, Uruguay has been suffering from extreme drought, so much so that the government declared a state of agricultural emergency, with an estimated $1.2 billion in losses occurring mostly from farming and livestock industries.

Source: The Guardian 2023

Recently, the United Nations World Water Development Report predicted that approximately 6 billion people will suffer from clean water scarcity by 2050. The problem is simple: less than 2% of the world's water is usable for drinking, and technology to unlock the remaining 98% has simply not become economically viable.

Source: Macrobusiness 2024

But supply is only half the story. Over the last 100 years, global water use has increased at twice the rate of population growth. This is mainly because as living standards improve, so does water usage. For example, it takes between 9 million and 18 million litres of water to operate a semiconductor facility for a single day. Taiwan Semiconductor Manufacturing Corp (TSMC) the worlds leading semiconductor foundry, reported that it used 81 billion litres of water in 2023.

This all happens at a time where weather patterns are significantly changing, and longstanding sources of fresh water are now not as reliable as they once were. A trend that scientists expect to not only continue but intensify.

Source: Statista 2024

What are we doing about it?

The Australian government has initiated a significant program aimed at buying back water allocations from agricultural users across the country. This strategy stems from a recognition of the critical need to address water scarcity and ensure sustainable management of water resources, particularly in the face of prolonged droughts and climate change impacts. By purchasing water entitlements from willing sellers, the government aims to reallocate water to environmental purposes, such as restoring the health of rivers, wetlands, and ecosystems.

This approach aligns with broader efforts to rebalance water usage and enhance the resilience of Australia's water supply systems. Additionally, the buyback scheme serves as a mechanism to mitigate over-extraction and promote more efficient water usage practices within the agricultural sector, fostering long-term sustainability while navigating the complex interplay between competing water demands.

With the Australian government's buyback program reducing the supply of water entitlements in the Murray Darling Basin, entitlement investors should anticipate a tightening of the market supply. This reduction in available water allocations could potentially drive up prices for remaining entitlements as demand persists or even increases. As the volume of tradable water diminishes, investors holding water entitlements may find their assets becoming more valuable due to their relative scarcity.