Why Oil is the New Water

Investing in water seems like a no-brainer but there are still risks to consider.

water at a treatment plant

Oil is usually the commodity we think of, when we think of the heart of the global economy, but in the 21st century, the price and supply of another scarce commodity is beginning to generate headlines. It’s a commodity even more important than oil, and at the heart of everything we do—from growing food to manufacturing to hydrating. I am of course talking about water. As water becomes more scarce, water investments become increasingly essential.

This is why the late Texas billionaire T. Boone Pickens became the largest individual water owner in America, purchasing rights to an underground aquifer that supplies 27% of all irrigation in the United States.

And while we take an inexpensive and steady supply of water as a birthright, in much of the world, this is anything but the case. Take Jakarta, Indonesia, for example. According to the United Nations, 42% of its 10.7 million residents do not have running water. In many countries, the situation is much worse.

Water is a hot issue all over the world. Even in China. Waters originating in Tibet supply around 30% of China’s fresh water but it is a long way from China’s arid regions in the industrial northeast. The Economist sums up the predicament well:

“Grain-growing areas around Beijing have about as much water per person as such arid countries as Niger and Eritrea. Overuse has caused thousands of rivers to disappear. The amount of water available is diminishing fast as the water table drops and rivers dry up; what little is left is often too polluted even for industrial use.”

The high demand/dwindling supply fundamentals underpinning this story seem unassailable. The world’s per-capita water consumption is accelerating – up six-fold in the last century, with no end in sight. The World Bank estimates that global water demand is doubling every 20 years.

Is Investing a Water a No-Brainer?
With this doomsday scenario, one would think that investing in water would be a no-brainer. Not so fast.

First, if you think oil is political, water is five times more so. Governments heavily subsidize water prices and like to keep tight control over water supplies. I found this out personally not all that long ago when I sought my fortune by becoming involved with a couple of entrepreneurial water companies. One company used wave action off Galveston, Texas, to create energy to pump fresh water to farming communities. The other was a deep- drilling technology company looking to find water locked in deep pockets of the earth’s crust in the Middle East.

The second challenge is that most water investment opportunities are boring, low-growth utilities and water treatment plants. A more promising area is water infrastructure.

One reason for the lack of clean water is old and inadequate water infrastructure. Aging municipal water pipes have been disintegrating, causing money to flow away from city water districts and resulting in contaminated water. As water becomes scarcer and more expensive, an increasing number of water districts are expected to shoulder the cost of detecting and fixing leaks.

If you’re thinking of investing, one company that fixes these problems (and much more) in the U.S. and around the world is Milwaukee-based Rexnord (RXN). Rexnord Corporation designs, manufactures, markets, and services process and motion control, and water management products worldwide. The stock is in a strong uptrend as the company has made several smart acquisitions to broaden its industrial product lines.

A broader approach is to go with the exchange-traded sector fund Invesco Water Resources ETF (PHO). Some of its top holdings include companies such as Danaher (DHR), American Water Works (AWK), and Waters Corp. (WAT).

Investing in water could mean big gains in 2021.

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