Oil and Water: A Guest Post

INSERT DESCRIPTIONDavid Zetland

David Zetland, the S.V. Ciriacy-Wantrup Postdoctoral Fellow in Natural Resource Economics and Political Economy at U.C. Berkeley, blogged here earlier this week about the economics of water. This is his second of two posts on the subject.


Oil and Water
By David Zetland
A Guest Post

Over the past few months, newspapers, blogs, and television screens have been filled with stories of two precious liquids — oil and water. Although the stories seem similar (demand outstripping supply), they report fundamentally different means and success in coping with “shortage.”

Ironically, we are coping better with scarce oil — nearly 60 percent of which we buy from abroad — than scarce water, which falls from the sky.

Why such a contrast? Because oil is bought, sold, and marketed as a commodity. Water, in contrast, is treated as a “human right” that should not be allocated by price. Because scarcer oil costs more, quantity demanded falls to equal supply. Because scarcer water does not cost more, demand exceeds supply and rationing, misallocation, and hardship result.

Put differently, we would not have water shortages if water prices rose and fell with supply and demand. But prices do not change that way.

Most water users in the U.S. pay a price for water that reflects the cost of delivery. The price of water is actually zero.

Although the fixed costs of dams, pipes, etc. and the variable costs of pumping (20 percent of California’s energy is used for “moving water”) are large in aggregate, those costs are spread across many units of water. In southern California, for example, urban water customers pay about $3 for 750 gallons of tap water, most of which is imported from hundreds of miles away.

When demand exceeds supply, water managers do not raise prices; instead, they ask customers to use less. When “voluntary” conservation fails (often), managers send water cops out to ticket those who water their lawns on the wrong day, impose mandatory rationing of 20 percent, stop issuing building permits, etc. Although such methods do have some impact, their blunt nature affects people in odd, often unfair, ways.

Mandatory rationing, for example, is based on household use in prior years, which fails to reward those water misers who used less in the past and fails to recognize that the number of people in a household can change. It is also rather ineffective: Anyone who goes over quota pays an extra $1 per 750 gallons. That’s not much.

Students of bureaucracy and monopoly will note that water managers have little incentive to manage water efficiently. They can “declare” a 20 percent reduction in demand (nice round number) without worrying about the most efficient way to achieve it. They keep their jobs no matter the cost (e.g., business closures) or ineffectiveness of rationing.

Why haven’t water managers turned to higher prices?

First, because they are used to prices that reflect costs; second, because higher prices are politically difficult to impose; third, because their “public service” mandate tends to require that prices be set as low as possible and result in zero profits; and fourth, because many in the water business think that people will not respond to higher prices.

If water managers wanted to implement conservation prices that were, say, 200 percent higher than current prices, they would need political support (most urban water is supplied by public utilities; investor-owned utilities are regulated). Politicians would be able to support higher prices if the poor were protected (e.g., by giving everyone some water for free and charging more for additional water), if “excess” revenue was rebated (per capita rebates would be progressive), and if higher prices ended shortages and rationing.

Can higher prices reduce the quantity of water demanded? Yes — just as higher prices reduced the demand for oil.

When oil (gas) was “cheap,” we didn’t pay attention to how much we used. Instead, we paid attention to how fast our cars went, how long we’d be willing to drive from an affordable home to work, where to shop for cheaper stuff, etc. When prices rose (most notably when crossing the $4-per-gallon barrier), we changed our behaviors: S.U.V. sales plummeted, total driving fell, and people moved closer to work.

If water prices were raised to levels worthy of attention, we’d see the same reactions: people would reduce water consumption in the short run (not watering the sidewalk) and long-run (installing high-efficiency appliances, ripping out lawns, moving from drier places, etc.).

Let me repeat one caveat and add another: Higher prices need not harm the poor. If everyone got x gallons of water at a low price, only those who used more would pay higher prices. Second, these price-reform suggestions are relevant to urban water management, not water users everywhere. As many readers will know, agriculture consumes 70 to 80 percent of the water in the United States, and I have addressed agricultural/urban/environmental consumption elsewhere.

Bottom Line: We don’t have a gas shortage because gas is expensive; we will have a water shortage until water is expensive. Want more water? Pay for it.


Miguel Barbosa

Hi David,

Great article. I have already linked to it from my website on worldly wisdom. Www.simoleonsense.com Wish you the best.

Best Regards,
Miguel Barbosa

www.simoleonsense.com

Joe Smith

It makes no sense to deal with consumer agricultural and industrial uses of water separately. For the market to be efficient everyone in each watershed needs to pay the same base price for water plus the cost of delivery to that user. If we stopped subsidizing farmers' use of water we would be better off.

Ladi

Nice post but here's my take on this:
Oil is really not a necessity. Besides, we have other alternatives to oil. So if the price jumps people would switch to alternative energy, or change their consuming behaviors.
However, as for water....that's the only "alternative". Nothing can substitute for water. We need it to live. So i'm not sure if we are comparing apples to oranges here. Someone should shine more light on my blind spot.
Thanks

Brandon

Add these great points to the fact that if purchased in small enough containers H2O can be more expensive than oil.

Ronaldo Assessoria

Not only should gov. and corp. which control the water plants charge more for heavy water consumers, but they should certainly begin looking forward to alternatives such as producing hydroplants ???????

imobiliarias santa maria

SD Dan

A hundred cubic feet of water here in the city of San Diego costs less than a Big Mac. That's enough for two weeks of showers. A shower costs me, at most, a quarter. That's the same rate that the city charges for 12 minutes at a parking meter.

Yet... I'm urged to conserve water. Why? So developers can build yet more suburbs around southern California? So golf courses can continue to have their plush greens? So that my neighbor down the street can continue to have his very manicured lawn in front of his trophy house? It's not costing him much, maybe $10 more a month in water... and $75 for the gardeners to mow and blow. His wife just blew through $40 of candle accessories at Crate and Barrel. What's $10 to him for curb appeal?

So why should I conserve? Water is a cheap commodity, and there's no reason why I shouldn't use what I want? If I don't use this cheap water, someone else will: for their golf course in Tucson, their swimming pool in Phoenix, their subdivision in Vegas, their rice paddy in Sacramento, their cotton field in Bakersfield, their alfalfa field up in Mojave.

I'm going to use what I want. It makes no sense for me to conserve water, given the current pricing structure. What, forgo a shower a few times a month? That dollar I save is less than I tip for a beer at the neighborhood bar.

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htb

This problem is not exactly about water. It's about *potable* water, which is a very different issue.

Imagine that you go outside to water the lawn. You turn on the sprinkler. You forget to turn it off. You discover a sodden mess of a lawn the next morning. You just wasted all that water, right?

But it still exists, right? The water molecules did not quit being water molecules. They just can't be conveniently reused for other purposes at this time.

Water should be free -- and it is: it falls out of the heavens periodically. We call it rain. Potable water should cost.

Dhammer

How about giving discounts on water rates to buildings with green roofs, rain barrels or underground storage systems that keep water from going into the sewer? It drives me nuts to see thousands of gallons of water get washed into the sewer every spring (where we strain waste processing plants) and then see people use potable water to water their lawn come August.

Also planning plays a big part - lets stop development in areas where the water levels can't sustain development. I'm sympathetic to the guy who doesn't want to conserve water when there's a golf course getting built down the street. Parts of the south and southwest shouldn't have people living in them - it's good for the earth if we slow down development in certain areas.

In many areas the water infrastructure is decaying terribly and millions of gallons are lost to leaky pipes. I'd actually prefer to see urban areas expand free water to residents and conserve water in the infrastructure.

Huge amounts of water, used as a coolant are used industrial settings - raising the cost of water for industry will increase prices, and potentially hurt jobs. Maybe an acceptable outcome, but one worth noting.

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Shun-CMS

A very interesting article. I don't much about the environment science, so this might sound ridiculous, but... would water ever run out? I mean, I remember from gr6 science class that, water recycles around earth. evaporation (from any body of water - ocean...), transpiration, water vapour, precipitation - rain/snow, infiltration, ground water, lakes streams (body of water)... and this loop would continue. So, instead of worrying about water running out, maybe we should consider how this water can be more usable - that is, by making more water purification or filtration plant in poor countries. For instance, in the DR, when the tropical storm "noel" came last year, government around the world sent money and other supplies, but the Japanese government sent water purification machines. Even though, there is no food, with water, you will be able to survive. Fortunately, in the DR it is warm enough, so no need to worry from dying of cold (like in Alaska...). But they needed water. My point is, there should be more effort, and subsity put on for technological development for better water purification plants, use, or create something new like a "portable water" in solid form and by shaking it, changes to a potable water for example.

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PedroR.CMS

I definately agree with maxicms because there are multiple ways in which we can improve or control the various uses of water in order to make it more efficient, and therefore more abundant. But unlike oil, we need water for our everyday basic nessesities. So I believe that instead of incrementing the price of water as a whole, we should set a standard for what a typical household requires per month, and then heavily charge any properties that consume extra.

Not only should gov. and corp. which control the water plants charge more for heavy water consumers, but they should certainly begin looking forward to alternatives such as producing hydroplants with de-salination capabilities so that freshwater resources won't exhaust.

CamilaCMS

What a great article! In this day and age, we are always thinking up ways to conserve and save our planet, by doing the same number of tasks with fewer car trips, turn off lights we aren't using, buying biodegradable shopping bags to take to the supermarket. Water, however, is a different story. Showers are long, water is running while brushing my teeth, we flush in excess, etc. Water is just too darn cheap.

However, I think that because water is so vital to our everyday chores, it is important to have it available to everyone. But if water was priced a little higher because of such a high demand, then those who use it excessively and wastefully will be more conservative. This solution works with other examples, including electricity and gas.

This might be hard to put into effect because this policy may be seen as immoral and unfair to the populations of poor countries that wouldn't be able to support the burden of such a cost. Plus, in these countries corruption is rampant.

In other words, why should a poor farmer who uses water very carefully and only for necessary actions have to pay because I take 20 minute showers daily?

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Tkwon CMS

"Bottom Line: We don't have a gas shortage because gas is expensive; we will have a water shortage until water is expensive. Want more water? Pay for it. "

This is why Washington is ruled by politicians. I bet that most people (me included) have a hard time imagining a world where there will be water shortage when water itself falls from the heavens (I am not saying there won't be water shortage, but to try and change the mindset of consumers will be close to impossible)

Water will be considered a commodity under two very unlikely scenarios: 1. Water becomes so scarce that people have fist fights on the local store for that last bottle of water. 2. When humans no longer have to drink water to survive.

maxicms

Perhaps, one way to generate profits for those who control the water supply would be by requiring restaurants to charge a rather minor amount for the tap water, they otherwise would provide freely. The money that is driven from the pockets of these customers goes directly to the water companies. Thus, the restaurants do not lose, seeing as they are simply the middleman that transits the money from one hand to another. This would produce enormous amounts of profits, since tap water is ordered virtually everywhere. The only negative response might be that cosumers might simply order another drink rather than have both their typical drink and water as a side. This is only one of various solutions to the low water supply issue; in essence, the idea is where water was once provided "freely" a minor charge must now be implanted.

mella

Studies have shown that America's 'water footprint' is twice the global average. Clearly, we're using more than we need to sustain ourselves. Tiered rate structures could help increase our awareness of consumption patterns and make use-appropriate adjustments.

A comment with respect to your suggestion that 'excess revenues' be rebated: I propose instead that those monies be invested in supporting necessary land use changes (establishing long-term floodplain buy-back programs, increasing pervious surface area, etc.), water quality programs (source control of pollutants, groundwater cleanup, etc.), and conservation incentives/education (ET meters, transitioning to climate appropriate landscaping, etc.) in urban areas.

California in particular needs to work towards a more locally sustainable approach to water supply, but to do so will require more than a strong conservation ethic.

WcH

The more I read of Aguanomics, the more I agree with what David has to say. Keep it up!

I would like to see some examples of communities that have significantly raised their prices as David has suggested (if there are any) and see what sort of actual impact that has had. What sort of order of magnitude of price increases actually results in significant water use reductions? I'd also like to know the sort of public messaging that municipal water utilities that have significantly upped their prices have used as well as how they have dealt with resulting revenue changes, since as David points out, most utilities can't really generate a profit, nor can they run in the red; they are in a tight spot and run a risk of significant revenue fluctuations if the pricing is done poorly and not quickly adjusted as needed. With government bureaucracies, those quick adjustments aren't always possible.

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PedroCMS

Higher water pricing is very unlikely due to the fact that, as Zetland says, it is politically difficult. No matter how you look at it, economists will always dream up the solutions, but politicians get to decide whether they get passed or not. Higher water prices would work economically, but they just wouldn't work politically.

Rationalitate

"The economic argument on water breaks down for me because while I can live without oil/gasoline for days or even weeks at a time, it would be really hard for me to do the same with water."

The same could be said against food. And yet, the government does not have a monopoly on food production. And somehow, starvation in America is literally nonexistent, and food for the homeless/anyone who wants it is incredibly abundant in any reasonably-sized American city.

(And yeah, you can say that we do have food shortages, and talk about Americans not getting enough nutrition. But that's a question that has more to do with farm subsidies than with the market's inability to supply people with food that won't give them adult onset diabetes.)

http://rationalitate.blogspot.com

AYouthIntheWilderness

Fabulous. Until we learn to price water realistically it will remain an issue of great contention in the American West and increasingly, all around the world.
Demand for drinking water is inelastic: demand for Olympic-sized pools is not.

VidalCMS

Pay higher prices for a technically free resource? I don't think so. Water is not a scarce resource; the demand for water has not outweighed its zero value, simply because 3/4 of this planet is covered with water. Maybe only 3% is fresh water, and consumption is increasing by the minute. But, paying more than the cost for transporting water to an individuals household is unfair.
Moreover, if we must pay more to use more water. What is the limit of water that one is allowed to use? How can one estimate the "correct" amount of free water given out to people? That limit would reduce every single second because more and more humans are born everyday.
Even if 3% of the surface is fresh, once we have consumed all of it. The alternative is converting salt water into fresh. A rather expensive alternative, but the main point is that water will never run out. Water will never disappear from this planet; humans would disappear before water does. Hence, there is no need to raise prices for water because water will always be available.
But, that does not mean people can just waste water. There is a different meaning between using it and wasting it. I am completely in favor of educating people to consume less water and be efficient (same with oil).
Charing more to people who supposobly "use more" is unfair because all humans share water a world resource being world citizens.

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BrianCMS

Very interesting piece and I have to say I completely agree. People keep saying future wars will be fought over water, that day won't be pretty.

The only time (most) people truly care about something is when it hurts their bottom line. If water is still as expensive as its cost, it won't have much an effect asking for voluntary reductions. If water were to have a more substantial cost, people would be more conscious of wasteful uses.

If it were to be charged in a way similar to electricity, like #11 suggests, it would force those who use the most, and probably waste the most, to change their habits, obviously a good thing. But the mentality that water is a right, not a commodity is hard to overcome, and those affected the most (big houses, big lawns) will complain the loudest...I can hear suburbia screaming already