Futures market: Wall Street’s thirst for water

Futures market: Wall Street’s thirst for water by Frederick Kaufman, October 25, 2012, Nature
What could be more catastrophic than betting on the world’s food supply? What about our water? Speculators can already bet on snow, wind and rain through weather-related futures contracts bought and sold on the Chicago Mercantile Exchange. The market value of weather grew by 20% from 2010 to 2011. But the sector remains small — a paltry US$11.8 billion. Still, weather futures indicate how restless Wall Street has become to transform Mother Nature into the mother of all casinos.

Some environmentalists argue that putting a price on fresh water may be our best bet to save the planet’s supply. The more it costs, the less we will waste. In fact, the financialization of precious resources underlies the Economics of Ecosystems and Biodiversity (TEEB), an international initiative hosted by the United Nations Environment Programme and supported by the European Commission, Germany, the United Kingdom, the Netherlands, Norway, Sweden and Japan. TEEB aims to calculate the worth of ecosystems down to the last trillion dollars, riyals or renminbi. And then there is the PES movement — payment for ecosystem (or environmental) services, which refers to such things as the air we breathe and the water we drink. Among the many supporters of this concept are the World Bank and the UN Food and Agriculture Organization. As TEEB’s 2010 report for business puts it: “Modern society’s predominant focus on market-delivered components of well-being, and our almost total dependence on market prices to indicate value, means that we generally do not measure or manage economic values exchanged other than through markets.”

Wall Street’s success in cashing in on the food bubble, Washington’s inability to regulate global derivatives and the push to commodify nature through TEEB and PES converged into a single focus this summer, when drought descended on the United States. With it came a slew of doom-laden social, environmental and economic predictions: there will be 3 billion “water-stressed” people on Earth by 2035; water shortages will become chronic, wildfires will be pervasive, monsoons will be even more unpredictable; and snow run-offs will radically decrease owing to increasingly sultry winters.

At the same time, water is becoming essential to a widening variety of industries, from hydroelectric power and fracking to beer brewing and semiconductor manufacturing. Hydrologists warn that water tables are dropping across Asia. Political scientists predict squabbles over the ownership and use of Himalayan rivers, and every water-well driller in Nebraska knows that the Ogallala aquifer under parts of the midwestern United States is declining at an alarming rate. The implications are dire: the destruction of aquatic ecosystems, the extinction of innumerable species and the risk of regional and international conflicts — the much-dreaded ‘water wars’ of the twenty-first century. What will Egypt do when Ethiopia dams the Blue Nile? What will happen when Yemen becomes the first country to run out of water? The short answer: nothing good.

Investors of all stripes adore the apocalyptic vibe. Within the interstices of violence and chaos there will be money to be made. These days, the biggest profits do not come from buying or selling actual things (such as houses or wheat or cars), but from the manipulation of ethereal concepts like risk and collateralized debt. Wealth flows from financial instruments that are one step away from reality.

Investing in a water index is now more popular than ever. There are more than 100 indices3 that track and measure the value of stocks of companies in water-related businesses, such as utilities, sewage treatment and desalination. Several offer healthy returns (see go.nature.com/zrl4qo). As a result, the World Bank and the International Monetary Fund — both always on the lookout for market-based security for the billions of dollars of credit they extend — have been pushing countries to privatize their resources. These include the lakes, streams and reservoirs of Argentina, Bolivia, Ghana, Mexico, Malaysia, Nigeria and the Philippines (see, for example,go.nature.com/iuwp8m). What better guarantee of prosperity than a rush of multinationals determined to generate revenues from something no one can manage without?

Making money come out of the tap means that fresh water must be given a price anywhere it is traded — a global price that can be arbitraged across the continents. Those in Mumbai or midtown Manhattan who understand the increasing value of water in the world economy will speculate on this undervalued ‘asset’, and their investments will drive up the cost everywhere. A water calamity in China or India — and the food inflation, political instability and humanitarian crisis that will surely follow — will reverberate in price spikes from London to Sydney. This is how bankers will profit.

When the state of Texas tallied up to $10 billion in economic losses due to the recent drought, academics set about theorizing how the water of the Rio Grande might be indexed for a futures market. After the floods in Thailand last year caused economic losses totalling $46 billion, Thailand’s Securities and Exchange Commission studied the possibility of financial derivatives indexed to rainfall and dams. The semiconductor manufacturer Intel might have been interested — the mud and muck that reportedly halted its chip-making operation in Thailand cost the company up to $1 billion.

Commodity theorists in Switzerland have taken the first steps in setting up markets that will trade in water futures derived from sewage. The team calls its concept an ethical water futures market (see go.nature.com/dq6fm4). In my view, it is a financial platform to sell treated water to the highest bidder.

After all, if the natural-gas industry can pay more for water than soya farmers, then the gas drillers will get the water and the soya will not. [Emphasis added]

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