Articles
06.04.10

Water is not a commodity

Article # 3 Written for Western Divestments Publication March 2010

Water: a commodity or the essence life?

The 1966 Commodity Trading Manual published by the Chicago Board of Trade described crude oil "a product that contains 1% to 3% lecithin, extracted through degumming with water and steam - an antioxidant, emulsifier, and softener used in many food and non-food industries".

The manual featured a picture of crude oil traders examining a soya bean sample - looking to establish the quality of the product being contemplated for exchange. The same manual defines a cash commodity as "physical merchandise; or goods available for delivery immediately or within a designated period following the sale…"  A commodities market is generally considered to be a physical or virtual space where willing buyers and sellers meet to exchange agricultural or mined goods.  We often talk about commoditization of a good or service implying marginal value to something that is readily available in a market place. Scarcity brings a premium for commodities in the market place.

At the time the CBOT developed this commodities trading manual, the crude oil we know today Saudi Light, West Texas Intermediate, or Nigerian Bonny Light…was either regulated or based on a posted price that a refiner would pay.  Fluctuations in price and anything resembling arbitrage occurred based on pipeline and transportation economics.  A brief look at an historical price chart for crude oil, prior to 1973 and in dollars of the day, hardly shows a pulse. Oil traders and technical analysts studying resistance levels, contango, and differentials were more likely to be devising a hedging strategy in what crop to plant after learning their neighbor was betting long on winter wheat. The oil price shocks of 1973, the launch of trading crude oil, from a hydrocarbon based source, on the NYMEX in 1983 changed the nature of the commodity we call crude to the degree that most people can now offer speculation on what the price should be.

Water is not a commodity. It is the essence of life.  To create a market for water where the highest bidder can expect delivery within a reasonable time frame would commoditize the essence of life. Jurisdictions and governments would essentially be placing a marginal value on citizenship based on the ability to pay for the commodity. 

Over the weeks and months ahead Albertans are likely to hear more on the dialogue of creating a water market.  In the late 1990's the government of Alberta legislated the Water Act.  Subsequently Alberta's Water for Life Strategy has been designated as go forward plans to ensure Albertan's have access to a safe reliable supply of clean water and confirms water is owned by the Crown.  This plan will move ahead regardless of constraint in old habits and legislation that relied on elements of the common law practice of the rule of capture and the frontier logic of first in time, first in right (usually referred to as FITFIR). It is clear that population growth, industrial demands, and the simple fact that water has to be shared across jurisdictions, even if only to engage in the principles of peace order and good government, dictate the need for change. In and around all of the above southern Alberta has seen over allocation in basins, heated dispute over water licensing and transfers from one basin to another, and questioned if water is indeed the renewable resource we have believed it to be.

If this rant is starting to sound like the underpinnings of creating a market for something that is scarce…you bet your last drop it is. This is a market like no other, however.  This is a market for our most precious resource. This is a market that ensures a basic human right, one that ensures the right to live well, this market is not for profit but a market of beneficial use.  This market gives us 'Water for Life'.  It is emphatically true that placing a value on the fabric of natural capital is essential in our world of constrained resource use. A water market that establishes ecosystem based planning and riparian area health first will indeed provide Albertans with a viable economy for the future.  A market based on beneficial use could also place a premium on all other commodities produced in Alberta.  For the cattlemen reading this article a healthy landscape can open up a market that is symbiotic with what we once referred to as the Alberta Advantage.  It could bring customers to our doorstep hungry for a meal derived from a grazing system that actually values the most fundamental resource on the planet. There are jurisdictions around the world that envy the possibilities a water market based on beneficial use could provide in Alberta. Before this opportunity is squandered away the dialogue on valuing natural capital should be begin and end with valuing water. 

The oil industry will have to deal with the gremlins built into various processes of oil production. A barrel of synthetic crude oil produced with Athabasca river water may not command a premium relative to a barrel of Saudi Light or WTI produced under conventional processes. It may become an outright cost. Oil production, winter wheat planting, and cows are privileges granted based on beneficial use by the Crown and the thirsty citizens of Alberta…not a right. All users of this market should have to earn the right of use based on a best practice that values water and healthy watersheds first.  Headlines articulating the concerns of New York State and its watershed with respect to shale gas production will echo these comments.

Alberta's oil industry may become less competitive with other jurisdictions or we may in fact excel in the ability to produce a barrel of oil without adverse effects on watersheds.  There is a market for this expertise in other oil bearing geologic provinces.  Organizations like the Pembina Institute advocate a charge for industrial water use.  The ERCB has officially stated companies will have to compete for water use and disposal space in the future.   Why is it some companies believe water is free, and some research advises that where river water allocations may exceed a limit, there is always ground water?  Robert Hirsh the Chief Hydrologist from the US Geologic Survey eloquently describes ground water and surface water as "a single resource intertwined..." In other words; senior or junior license holders may have to put their collective water-guzzling belly up to the bar and understand that an allocation is a privilege and is part of a strategy that requires investment in our immediate future. 

We all bear the cost of a water market.  The alternatives are catastrophic. If faced with a  choice between a barrel of oil, an ounce of gold, or a final drop of water my choice is simple…I will manage all inconveniences of lifestyle, saddle up my horse to engage in commerce, and search out my last cup of Athabasca Light, or Bow River Blue.  It is, after all, simply about making the right choices.

 

Patrick D. Brennan, Upstream Research, www.upstreamresearch.ca  Energy Market Prospecting through Best Practices, can be reached at Phone: 403-444-7396, or email: pdbrennan@upstreamresearch.ca