Why Water Is Not The New Oil…Or Is It

Nowhere is this platitude more recited than here in Texas, where homegrown oil-and-gas money — and now even global capital — is flowing into the next resource boom: groundwater.

T. Boone Pickens’ Mesa Water, which was the first to acquire groundwater rights from landowners for export to thirsty communities, is just the best-known name in the state’s burgeoning groundwater market. It also includes BlueWater Systems, the Val Verde Water Company, Heritage Commodity and Forestar.

In October, Abengoa and BlueWater won approval for a $3.4 billion project to pipe groundwater 140 miles from Burleson and Milam counties to San Antonio.

We Texans are by no means alone in commoditizing water. The share price of Cadiz, the sponsor of a project that aims to mine and bank groundwater beneath the Mojave Desert and sell it to parts of drought-stricken California, has more than doubled in the past year. A new water futures market was launched this year in Australia.

It’s indisputable that there’s money to be made in water, especially as it becomes scarcer. But at what cost? Treating water as a commodity, no different than oil, neglects fundamental differences that we ignore at our peril. Here are three reasons why water is not the new oil:

1. Oil has no value except in its production. Water, in stark contrast, creates value intrinsically. Flowing rivers enhance property values; dried-up riverbeds diminish them. Groundwater plays a critical role in this value creation, as its slow, steady seepage into rivers creates reliable baseflows beyond the uncertain supplies from unreliable rainfall. If that hydrological connection is severed through over-pumping, the value the water once created is lost.
2. When an oil reservoir is depleted, the value of the land will decline, but the land itself will still have some use. When economically viable water has been removed from an aquifer, the usefulness of the land above it is irrevocably damaged.
3. Oil will eventually be replaced by other forms of energy,but water will always be as necessary to future generations as it is for us today. While it may be economically rational to maximize oil production while it’s still in demand, there are many reasons not to maximize production of groundwater. Water provided freely by nature will always be more cost-effective than water produced through treatment or transported from far away.

So what do these fundamental differences mean for how we manage water and how we harness its economic value? We must manage water differently than oil — to sustain regional water resources and natural hydrological flows in the long term rather than maximizing production for short-term returns.

Yet decisions on whether to deplete or sustain aquifers often hinge on wide-ranging, often outdated, legal frameworks developed over a century ago.

In Montana and Oklahoma, where water above and below ground is the property of the state, pumping is limited to quantities that would not affect surface water flows. In California, new landmark legislation promotes improved groundwater management, but the law still lacks teeth to enforce pumping limits. Here in Texas, where groundwater is private property, courts have found that even reasonable groundwater regulation may be a “taking” of private property. These courts have even gone so far as to suggest that groundwater production be shaped in the image of oil and gas regulations, which are designed to maximize production.

Right now, individuals, local communities, corporations and investors have equal opportunity to destroy long-term economic value by over-pumping our groundwater resources. They’re also vulnerable to the global trend of aquifer depletion, which threatens long-term economic health and national security.

We can create water markets that protect groundwater for the future and meet our needs today, but those markets cannot mirror those of oil. To develop markets that work, we need consistent regulatory frameworks that limit groundwater use. With water use capped and sufficient water maintained for ecological and basic human needs, regulators can rationally structure trading between water users.

Today, these markets are far too rare, especially those that enable trading between hydrologically connected groundwater and surface water users. Given that all Texas rivers begin as groundwater, investing in the union of these legally divided water systems through integrated regulation and market-based water sharing has the potential to create value for all of us — both those of us who are alive today and generations far into the future.