Water and Oil Markets Don’t Mix
We’ve all heard the expression “Water is the New Oil”. It’s a cliché expression, repeated often and little understood. It’s a headline that misleads us to think oil market strategies govern the provision and supply of water. Water investing has a lot more in common with real estate than it does oil.
Water markets differ from oil markets in some pretty important ways. Oil markets are globally connected, where prices are set on exchanges. There is a national pipeline distribution system moving supply across the country and to global distribution. I’ve heard it said before, if New York City had the same water supply issues as the western US a water exchange would’ve been established when the first commodity exchanges launched.
Picture with me for a minute what water prices would be if water was in fact like oil. In this example we see a small family of 3 people using 5,000 gallons per month. Their water use is the lowest in their neighborhood because they do not have an irrigation system. If water prices were set like oil prices the water bill for this family would be billed in barrels from prices set on global exchanges. At $60 per barrel our family’s monthly water bill would be $7,143.
Our example is a little silly but it illustrates key differences between water and oil markets.
Water Markets are Hyper-local
There is no national grid moving water through trunk lines from, say, Texas to New York like you find with oil and gas. In fact some of the most difficult water delivery projects I’ve seen, the ones with the highest risk of failure, involve moving water supply between a few counties within a single state. The level of controversy caused by these projects brings up colorful images of Mary Shelly’s famous story Frankenstein, angry mobs with pitchforks and torches.
Water Price Data
Significant difference between water and oil is the availability of water price data. The price of water is not transparent, some call it down right murky.
There are a few ways to consider price and water. A common approach is to look at an urban utility bill. Take this example from Circle of Blue. This is an example comparing 30 big cities and the price paid for access to water supply.
Utility rates are often set with regulatory oversight from a public utility commission and don’t have any detail on the supply chain of water sourcing and delivery. The number of actors in this market mean a survey of even 100 retail rates for the largest cities obscures the majority of water market actors.
There are approximately 153,000 public drinking water systems, more than 80 percent of the U.S. population receives their potable water from these drinking water systems.
Wholesale transaction data is useful to evaluate the market value of water because each contract is independently negotiated. The price paid for water rights or supply is determined by arms-length negotiation, very different than retail rates. Water transactions include the lease or purchase of water rights, and the purchase of physical water supply.
From a case study we did on Texas water transactions we see there are wide price spreads to acquire water at lower volumes. Prices tighten above 10,000 acre feet per year. There are several reasons for the price spreads but weather, especially drought and rain cycles, can impact the sales price at the time of negotiation.
Water markets are widespread and also appear in property transactions where water is an important motivating factor of the buyer. Water is not explicitly priced into real estate but it is a key right supporting beneficial use of a property.
Water is a Real Estate Niche
Water investing has a lot more in common with real estate than it does oil. Historically a water right, in-and-of itself, is not especially transact-able. And yet the possession of water rights is highly valued. Why is this? Water is married to real estate, the two property rights are a symbiotic fit.
Water is a buttress resource, necessary for productive use of every kind of property. In places where the supply of water cannot be taken for granted water is a real estate niche. The water market is widespread. We estimate 30 million properties with water features and rights in the United States from our work developing https://waterninja.com/sales/. Many different segments within real estate are affected including commercial, industrial, farm and ranch, residential, and undeveloped land.
