Gambling on water rights in the West
by Henry Frech
A while ago I watched a movie called The Big Short. It followed the story of Michael Burry, a hedge fund manager who bet against the housing market far before it crashed in 2008. The story revealed the corruption and greed that caused that horrible crisis.
The Big Short scared me, for it was the first time I learned about the vulnerabilities of our national market. Plus, after the film faded to black and began to roll into credits, its director warned the audience with one last message: “The small investing [Michael Burry] still does is all focused on one commodity: water.”
I was alarmed that Burry considered water a worthwhile investment. I thought that if his cunning mind once predicted the fall of a booming housing market, he might be doing it with our water market, whose downfall invoked dark images in my mind that resembled scenes in dystopian science fiction movies.
This year, I began some basic research into the state of water in the western US and learned that Burry’s investing has become commonplace. Everday, hedge funds buy rights to water, most of it coming from the Colorado River, in order to sell them to growing suburbs or hold them until drought spikes prices.
The Colorado River Basin has been locked in relentless drought since 2000, according to the Deparment of the Interior. The average annual temperature in Colorado has increased by over two degrees Faranheit in the last three decades and are expected to rise by at least another two degrees by 2050, which leads almost all scientists to believe that the west will not recover to its usual self unless humans can seriously reduce emissions.
Because of the Colorado River’s desperate state (the water levels of Lake Mead and Lake Powell, two of its largest reservoirs, are currently at all time lows), state governments are set to rewrite a century-old agreement on the sharing of the river’s water. This agreement, called the Colorado River Compact, dictates how water is allocated from the massive river to more than 40 million Americans across the western US.
City governments, farmers, and private investors eye this redrawing of the compact with serious attention. It will change the way water is handled in the US for years to come, whether through a strictly government led system or one that favors a free market solution.
Advocates of a laissez-faire solution claim that it will unlock a trillion-dollar trade opportunity for investors and companies everywhere. Just like oil in 1970s, they say, water could become the new hot commodity. In addition, some say that it is the best way to confront global warming, claiming that the private sector will be incentivized to innovate and use water responsibly.
Those asking for government control have much more to lose. Farmers, rural communities, and environmentalists generally prefer a system controlled by municipalities, one that doesn’t give the water to the highest bidder but to the neediest. These communities fear investors who buy water rights away from rural areas then sell them to growing urban areas, such as those near Phoenix.
I agree with these people. Our government should not only handle the distribution of our water but also the way it is priced. The alternative option, in which private investors are given near free reign to trade, would almost certainly result in exploitation of our water. In the 1850s with gold and the 1970s with oil, free market trading resulted in temporary economic booms but permanent conflict and exhausted resources.
Take the free water market in Australia, for another example. There, after the market experienced initial success, investors began buying water rights that farmers would otherwise own. Last year, in response to intense drought and forest fires, Australia’s antitrust department uncovered market exploitation by investors and reported a lack of adequate market regulations.
It is unwise to trust private investors (who would benefit from drought) with the depleting resource that is water. That effort should be led by our government. Recently, respected conservation organizations like American Rivers and Western Resource Association proposed five water solutions to the western United States that would support growing populations through 2060. These call for government oversight in most things water, including “municipal conservation, reuse, agricultural efficiency, and innnovation,” according to the report filed by the two organizations.
Our society must adapt to our shrinking water resources. On one hand, we can put our rivers under control of the government, the best representation of our population. On the other, we can put them under control of private investors, who represent only the upper echelons of wealth in our population.
A simple look at history (and viewing of The Big Short) tells us to choose the former rather than the latter.
