Scorching drought across the US West has caused demand for water to surge at a time when supply is thinning significantly. The federal government has had to declare the first-ever water shortage in western parts of the country, leading to supply cutbacks as reservoirs fall to record-low levels. Scarcity of the vital resource is not expected to subside any time soon, as droughts are causing a lengthy, more severe fire season and dry conditions are forecast to last longer than previously anticipated.
Water shortages linked to climate change have begun driving stronger investment into funds focusing on water infrastructure, treatment and conservation. Over the next few years, that investor interest is projected to rise further as water becomes an increasingly scarce resource throughout many parts of the world.
Related ETFs: Invesco Water Resources ETF (PHO), First Trust Water ETF (FIW), Invesco Global Water ETF (PIO)
Drought Triggers Water Usage Cutbacks
Drought in the US West, a trend that MRP has continually highlighted due to its effects on our LONG Agricultural Commodities theme, has triggered a slew of water supply shortages across the region.
The federal government recently declared the first ever water shortage along the Colorado River, which supplies drinking water for over 40 million people. The water cuts were triggered as basins along the river fell to record low levels. Two of the major reservoirs, Lake Mead and Lake Powell, are currently sitting at 35% and 37% capacity, respectively.
Years of continual drought have caused snow runoff from the Rocky Mountains to be absorbed before it can reach the Colorado River. The Wall Street Journal noted that this effect, partly due to climate change, caused the Colorado River to fall 2.5 million acre-feet below the Bureau of Reclamation’s forecast for the first half of the year, nearly equivalent to Arizona’s entire water allocation in a year.
Mandatory water cuts could eventually become a new normal for the Southwest, as the drought proves to be incredibly persistent. At least 95% of the US West is under some form of drought, with at least half of the region considered to be facing extreme conditions. High Country News reports that this fall fire season is expected to be longer and more severe due to these conditions, tightening water supply further at a time when demand is surging.
PBS News writes that water demand will have to be consistently curtailed until it matches supply, noting that demand has significantly risen over the last few decades for the fast depleting resource. California has asked its residents to cut back their water usage by 15%, while Arizona will see 18% reduction in its total supply from the Colorado River.
It should be noted that water scarcity is not a new trend. As the BBC writes, 40% of the global population is affected by water scarcity, while nearly a quarter of the world faces severe water scarcity at least one month out of the year.
Further, BBC highlighted a report from the United Nations and the World Bank which predicts that drought could put up to 700 million people at risk of displacement by 2030. It’s likely that demand for clean water rises as climate change accelerates, populations rise and economies grow, potentially setting the stage for ‘water wars’ over the next few decades.
Water Scarcity Boosts Commodity, Investment Must Rise Further
As water grows increasingly scarce, the price of the commodity has skyrocketed. In April, MRP noted the Nasdaq Veles California Water Index (NQH20), the futures contract which provides exposure to California water scarcity, had risen to $831.97, a 66% increase year to date. Now, that index has surged as high as $936.22 at the end of August, nearly doubling its valuation since the beginning of the year.
It’s likely that price will continue to climb, as California’s water reservoirs stood at just 53% of their historical average at the end of the July, keeping supply low while wildfire season accelerates, per MarketWatch.
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