Should private companies control our most precious natural resources (water)?

Interesting article entitled “The New Oil - Should private companies control our most precious natural resources?”

The answer is an unequivocal YES. I am without a doubt a free market guy. I have seen free markets in action and have experienced the innovation and financial strategies that result in far more efficient use of our resources. I have seen this in oil, natural gas, electricity, copper, gold and shipping to name a few. And these free and competitive markets work.

When the government controls the supply then investments are based on politics and not rational economic supply and demand principles. Even though there is a natural monopoly on the last mile of distribution for telephone, electricity or water does not mean that we can not effectively deregulate the supply side. In Texas and much of Europe one can pick your own supplier and pay a transmission charge for the local utility to move the power over the last few miles to your home or business.
Some suppliers charge a simple index or market price for the commodity (kind of like a variable interest loan compared to a fixed price loan). Other companies might offer a fixed price for the commodity over the next few years. But competition in the supply-side of commodities means choice and almost always lower costs in the long run.

In California the biggest user of water by far is agriculture. But under the leadership of the Federal government during the 1930’s to the 1960’s water was contracted to large farmers in what is otherwise desert land. Much of this would have made no economic sense at all if the growers had to pay the market price for the water they were using. And based on these subsidies and below market prices many of these farmers got rich. I am all in favor of people getting rich without subsidies but hate the notion if it happening on the back of taxpayers.

One school of thought is that water is just too important to privatize. But this is where I differ sharply. The more critical the service the more important it is to privatize because it will be done more efficiently and less politically than the government can ever accomplish.

The real critical needs for water come down to clean drinking and cooking water, showers and perhaps a small amount to run our plumbing systems. This is probably less than 10% of all the water used in the US. Virtually all of the rest (agriculture, manufacturing, lawns and gardens, and car washes) are optional. Now I am a big advocate of the US increasing its exports to the rest of the world via agriculture and manufacturing but if we price the water in an open market we will build the most sustainable economy and won’t build it based on hidden subsidies that result in the wrong crop being grown in the wrong place. Perhaps a water intensive manufacturing process should be situated in Sitka, Alaska rather than in the desert outside of Phoenix, Arizona. But if we have open and transparent prices for water, electricity, and natural gas our economy will adjust where and how we do things in a way that is far more efficient than politicians deciding what kind of subsidy they should give to a powerful grower or employer in their community.

Critics of free markets point to the potential for high volatility that we see sometimes in commodity markets like fertilizers, oil and pork bellies. The public is fine when prices drop dramatically but hate it when they go up just as fast. But most free markets allow for suppliers to offer fixed prices that give certainty over a given period (just like one can pay a bit more for a fixed interest mortgage today and remove the risk of interest rates going through the roof). Norway has perhaps the most volatile wholesale electricity prices in the world because the vast majority of the electricity is generated from hydroelectric systems. So in wet years, prices are low and in dry years they can be quite high. Despite this they have an open electric market for every consumer (residential, commercial , agriculture and industrial) that offers plenty of price structures (including fixed prices that remain flat in dry years) and countless suppliers all vying for the customer’s business.

There are ample mechanisms for moving water around the world during those peak periods when one area is having a shortage. From hauling icebergs, using tankers to transport across the oceans, trucking across the country or installing mobile desalination units on the coast. These water peaking strategies are far more expensive than pumping the water from 50 feet below the surface in your back yard. But the free market will figure out a way to solve the problem most efficiently. Plus in a free market, it is far easier to price the payback on demand side investments (like more efficient toilets or energy efficient light bulbs).

Water supply should clearly be deregulated along with retail electricity and retail natural gas. We just can’t afford the inefficiencies of government run (or private utility monopoly) systems to manage these precious resources.