Tuesday, May 27, 2008

Water is the New Oil

“It is clear our nation is reliant upon big foreign oil. More and more of our imports come from overseas.”
- George W. Bush

"When the well is dry, we learn the worth of water."
- Benjamin Franklin

You can own oil, but you can’t own water. You can invest in oil and the industrial complex that finds, produces, refines and distributes it. You can invest in the industrial complex that finds, produces, treats and distributes water, but you can’t invest in water itself. Oil and its byproducts are toxic to life whereas water is essential to all life. Perhaps therein lies the origins of the difference to investors. Fresh water is, for the most part, not owned by anyone but is (in most cases) managed and distributed for the public good. The price you pay for public water is essentially the cost to transport, manage, treat, and distribute it to the tap in your home.

You can’t – at least not yet – buy water on any exchange in the world. As water supplies get tighter across the world, this could change. Water is the new oil – a precious commodity, increasingly harder to find, manage and distribute; and that supply is often subject to the whims of Mother Nature. Control of available water is subject to the whims of government. In some parts of the country, the availability of water is restricting the building of housing.

Some regions in the U.S. are learning the hard way – the Southeast is entering its third year of drought conditions. Lake Lanier, Atlanta’s main source of water is over 13 feet below normal, despite recent rainfall. See embedded drought map of the U.S. below. The world drought map doesn’t look any better.

Like oil, water must be transported from where it is found to where it will be used. Pipelines are commonly constructed to bring the water to a central collection and treatment plant. Once at the central plant, the water must be tested and brought up to potable standards. Only then is the water released into the municipal distribution system. You may have seen news stories about large consumer products companies and their quest for water to fill the millions of plastic bottles they sell each year – a lot of this water comes out of the municipal tap. You may also have seen stories about the treatment of sewage to return it to the potable water supply – this is happening now in Southern California http://www.nytimes.com/2008/08/10/magazine/10wastewater-t.html?em.

Investors can tap into the water pipeline at four main places: infrastructure, treatment of water entering the system, consumer products (bottled water) and treatment of water exiting the system (sewage treatment).

You can find stocks of companies involved in the various phases of water treatment and distribution but as readers of this blog know, I am a big believer in the diversification benefits afforded by Exchange Traded Funds (ETF). There are currently two ETFs concentrating on water – primarily transportation, delivery infrastructure and treatment.

1. PowerShares Water Resources Portfolio (ticker PHO)

2. Claymore S&P Global Water Index ETF (ticker CGW)

PHO is more U.S. focused in its holdings while CGW is more international.

Investors can play the consumer products angle with stock in Coca-Cola – distributor of Dasani (ticker KO), Pepsi-Cola – distributor of Aquafina (ticker PEP) or Nestle – distributor of Poland Spring (ticker NESN). U.S. Consumers are paying more for bottled water per gallon than they are for gasoline ($1 for a 16 ounce bottle equates to $8 per gallon).

Asset allocation: these investments are primarily in stocks of companies involved in the water industrial complex - these are not a commodity play on the price of water.

Questions? kimm@sweetwaterinv.com

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