Thematic, innovative and bespoke investment solutions and thinking

# Investing in Natural Resources in a Changing World (Part III of V) – Why it is impossible to overstate the severity of the pending water crisis

## Issues to be addressed in this research paper

Water is a critical and increasingly scarce resource. About 2.1 billion people do not have access to safe drinking water. Adding insult to injury, 2.4 billion people (almost one in three globally) have no access to proper sanitation. In fact, more people have a mobile phone these days than have access to a toilet. Due to unsafe water and precarious sanitation, about two million people die every year, most of them in sub-Saharan Africa (Exhibit 1).

Climate change is altering patterns of weather and water systems around the world, causing scarcities and droughts in some areas and floods in others. Although bad consumer attitudes are partly to blame, this research paper is not about picking on bad consumer attitudes in certain countries. First and foremost, over the next few pages, I will zoom in on the countries that look to be in the biggest trouble, and I will suggest some ways to address a truly global problem.

We publish investment strategies and opportunities in our research papers. This research paper is available to professional investors as part of ARP+ subscription.

Water is a critical natural resource – we wouldn’t survive for long without it – so it fits naturally into our current research programme on natural resource investing. Furthermore, Running Out of Freshwater is an investment theme associated with two of the six megatrends we have identified. Access to clean water is affected by Climate Change, and it is affected by Rise of the East.

One final note before I begin. The following contains lots of data points. If I do not refer to a source, you can assume that the stats have been provided by Our World in Data which is rich on water-related statistics.

## The hard facts

Allow me to begin with a few hard facts on water which will set the tone for the rest of this paper. According to the United Nations:

• over 2 billion people live in countries experiencing high water stress;
• about 4 billion people experience severe water scarcity during at least one month of the year;
• assuming the climate continues to change at the current pace (and that looks increasingly optimistic), by 2030, water scarcity will displace up to 700 million people;
• by 2040, one in four of the world’s children under 18 – some 600 million in total – will be living in areas of extreme water stress;
• a third of the world’s biggest groundwater systems are already in distress;
• nearly half of the global population is already living in potential water-scarce areas at least one month per year and this could increase to some 5 billion by 2050 with more than two-thirds of those affected living in Asia.

The world is populated by approx. 7.8 billon people today, and that number is projected to rise to about 10 billion by the middle of the century. The combination of population growth, urbanisation and rising living standards in EM countries implies that demand for water will continue to rise rapidly.

Between households, agricultural and industrial use, the world consumes about 4 trillion cubic meters a year (Exhibit 2). While growth in water withdrawals in the OECD has been very modest over the last 40 years, EM countries (represented by BRICS and ROW in Exhibit 2) continue to face rapidly rising demand for freshwater. As the global population continues to grow, more water will be required, but many of the world’s water systems are stressed. Aquifers, lakes and rivers are drying up or becoming too polluted to use, and over half the world’s wetlands have now disappeared.

Rising demand for food, particularly protein-rich food, adds to the problem. According to The Economist, food production must rise 60% over the next 20 years to meet projected demand, and food production accounts for about 70% of all water withdrawals globally and as much as 90% in some countries. As you can see in Exhibit 3, producing beef is particularly demanding on our water resources. It should therefore come as no surprise that water scarcity is more than likely to become an even bigger problem as living standards rise.

## Water withdrawals

A huge amount of water is wasted every day as the result of negligent behavioural patterns – both in the agricultural industry and amongst consumers in general; however, it is not only about behavioural patterns. Differing climates also affect water withdrawals massively.

For instance, in the US, the average person consumes 1,207 cubic meters per year (source: Statista) while in the UK, the corresponding number is 164 cubic meters (source: onaverage.co.uk). That is a massive difference, which is certainly not due to dramatically different living standards in the two countries. US consumers are probably, on average, less conscious of this problem than UK consumers are, but the US climate is also much drier than the UK climate, leading to more irrigation over there.

As is evident when looking at Exhibit 4 above, water withdrawals per capita vary dramatically from country to country and is, generally speaking, much higher in drier climates. What is not evident is that, within each country, per capita consumption also varies a great deal. This can be explained by factors such as:

• diverging living standards from region to region;
• how built-up the regions in question are;
• variations in microclimate; and
• variations in consumer attitudes from region to region.

The agricultural industry is the biggest consumer of water but wastes much of it through inefficiencies. As already mentioned, it is estimated that the agricultural industry is responsible for 70% of all freshwater withdrawals globally. What I haven’t mentioned yet is the fact that 60% of all that water is wasted due to leaky irrigation systems and other deficiencies (source: WWF).

## Water scarcity

Water scarcity is widely perceived only to be a major problem in North Africa, the Middle East and Australia, but the reality is very different. The areas just mentioned all suffer from scarcity problems, but so do parts of Latin America and the US, all of southern Africa, India and many Asian countries. Spain is the main casualty in Europe (Exhibit 5).

Water scarcity prevails in densely populated areas and in areas with much irrigated agriculture (source: Science Advances) and is, on average, a bigger issue in EM than it is in DM countries. Whereas the Americans, Australians or Saudis just build another desalination plant, should they need to boost water supplies, that option is not always open to a landlocked country or to a relatively poor country.

Even cities located in relatively wet parts of the world face scarcity problems. Take for example London, one of the wettest capitals in the world. Around 2040, water demand is expected to exceed supply, which will almost certainly lead to major problems, even chaos, unless something drastic is done between now and then (see here for details).

## Will Egypt be the next Syria?

Syria underwent severe drought conditions from 2006 to 2011. Allow me to quote from an article posted by the Center for Climate and Security in 2012:

Syria’s current social unrest is, in the most direct sense, a reaction to a brutal and out-of-touch regime and a response to the political wave of change that began in Tunisia early last year [i.e. in 2011]. However, that’s not the whole story.
From 2006-2011, up to 60% of Syria’s land experienced, in the terms of one expert, “the worst long-term drought and most severe set of crop failures since agricultural civilizations began in the Fertile Crescent many millennia ago.” According to a special case study from last year […], nearly 75 percent suffered total crop failure. Herders in the northeast lost around 85% of their livestock, affecting 1.3 million people.
The human and economic costs are enormous. In 2009, the UN and IFRC reported that over 800,000 Syrians had lost their entire livelihood as a result of the droughts. By 2011, the aforementioned GAR report estimated that the number of Syrians who were left extremely “food insecure” by the droughts sat at about one million. The number of people driven into extreme poverty is even worse, with a UN report from last year estimating two to three million people affected.

My point is a simple one. You can blame Bashar Al-Assad for many things, but you cannot blame him for severe droughts. He cannot make it rain, even if he wanted to. The severe drought in Syria created difficulties of biblical proportions which, combined with an unresponsive Syrian regime under Al-Assad’s leadership, resulted in major social unrest. The outcome of that unrest was a catastrophic civil war which hasn’t ended yet, and out of all that came ISIS. Therefore, I don’t think it is far-fetched to claim that water scarcity played a role in the rising of ISIS and the subsequent surge in terrorism.

I bring this up because other Muslim countries are, in the years to come, likely to go through even more brutal conditions than Syria has experienced in recent years. Take Egypt – a Muslim country in North Africa with a population of 98 million people or almost six times as many as Syria’s. Egypt’s internal freshwater resources stand at less than 20 cubic meters per capita (and that number is from 2017, so it is probably lower today), leading to a heavy reliance upon the river Nile to provide the water it needs.

If you take another look at Exhibit 4, you can see that Egypt is, by African standards, a big user of freshwater – 910.6 cubic meters per capita annually as of the latest count – which has resulted in an annual water deficit of about seven billion cubic meters. Furthermore, as you can see in Exhibit 6 below, renewable freshwater resources in all North African countries are worryingly low. In fact, in Egypt, the problem is so acute that, within five years, its internal freshwater resources will have entirely disappeared.

With about 90% of all freshwater withdrawals in Egypt coming from the river Nile, the Egyptian government is understandably concerned about a new dam currently under construction in Ethiopia (see for example this story). Without water from the Nile, millions of Egyptians will die. The Egyptians have threatened the Ethiopians with all sorts of things, including bombing the new construction. Despite that, in the last few weeks, the Ethiopians have started to fill the reservoir even before construction has been completed. Only time can tell how that will end.

Whether Egypt declares war on Ethiopia or we have an armed conflict on our hands somewhere else, given the critical nature of water, a conflict somewhere in the not so distant future seems inevitable. Should the current tensions between Egypt and Ethiopia result in war between the two African nations, I note that both countries are just short of 100 million people today, and both are destined to grow fast in the years to come (Ethiopia even more so than Egypt). If an armed conflict breaks out, millions could suddenly show up on the beaches of North Africa, looking for an opportunity to slip into Europe, and those numbers will only get bigger if access to clean water is sparse.

In other words, the migration problems we have had to deal with in Europe in recent years could be only the beginning of much worse to come. The pressure on Europe’s borders could explode as water scarcity problems spreads. In that context, it is worth noting that, as of the last count, almost seven million people live in temporary camps along the coastline of North Africa, waiting to cross over to Europe.

## Does desalination offer a solution?

Desalination is widely perceived to offer the best solution to the world’s freshwater problems, and it is indeed correct that desalination is a viable outcome for most affluent countries. Having said that, desalination is not an option open to all countries, either because they are landlocked, or because the cost is prohibitively high. (I should add that some landlocked countries have salty groundwater which could also be desalinated.)

Before entering into a discussion about the pros and cons associated with desalination, let me explain the main principles behind it:

Desalination is the treatment of saline waters. The treatment process aims at obtaining fresh drinking water from the salty ocean waters or groundwater with high salt concentrations that make them unsuitable for human consumption.

(source: EarthEclipse.com)

There are more than 17,000 desalination plants in 150+ countries. The prevailing technology behind desalination is called reverse osmosis. Seawater is injected into a high-pressure treatment system, which results in one litre of drinkable water and one litre of very salty water for every two litres of seawater going in. The salty water is discharged into the ocean again (source: pri.org).

Desalination offers the most credible solution to freshwater scarcity available to mankind today. Having said that, there are a few problems associated with desalination:

1. it is very expensive to build a desalination plant;
2. it is very power-hungry to run; and
3. the overall environmental impact is far from perfect.

## A final few words

Much of the world will indeed run out of freshwater over the next few decades unless we change one or two things. Knowing humans’ desire for survival, the habits and attitudes that must change will indeed change. Having said that, it could possibly turn into a rough ride, before we come out on the other side. Syria has literally collapsed following the 2006-11 drought, and the same will almost certainly happen elsewhere in the not so distant future.

The ultimate solution to the world’s water problems is energy at virtually no cost, which will dramatically reduce the cost of desalination. Energy at virtually no cost is not as far-fetched as you may think it is. The world’s first desalination plant powered 100% by solar energy has been constructed in Dubai and, by 2030, it is the plan to desalinate all water used in the emirate with this technology. Switching from fossil fuels to solar will save them about \$13Bn annually (source: Inside Arabia). Further down the road – probably about 15 years from now – we can begin to roll out the fusion technology (which I covered in Part II), and that will reduce the marginal cost of energy to virtually zero.

You will have to wait for a little while if you want to know how you best position yourself for all of this, though. Part IV of this research paper will look into other natural resources than energy and water, and I hope to have that paper ready in about four weeks’ time. Only then will I switch my attention to the investment opportunities identified in Parts I-IV.

Niels C. Jensen

3 August 2020