Should the free market commodify an essential component of life? During the rise of Rep. Alexandria Ocasio-Cortez (D-NY), the socialist left has routinely railed against commodifying what they deem as human rights, such as health care and housing. But while these are not human rights since you are not entitled to the labor of others, her lamentations ignite a broader conversation about how much of a role the free-market should play in something as sacred as the chemical structure of Earth’s hydrosphere. We now have a new development on Wall Street that could resolve this dispute: Water futures.
Will this have devastating consequences, or will it solve the world’s intensifying water problems?
Water Futures: A Primer
The Chicago Mercantile Exchange (CME) recently unveiled a new contract that allows investors on Wall Street to trade water like gold, silver, and other commodities. Water futures are linked to the Nasdaq Veles California Water Index, California’s $1.1 billion spot water market. It will be the first of its kind, and it could soon lure interest from hedge funds and financial institutions, joining factories, farmers, and utilities in locking in prices.
This establishes a weekly benchmark spot price of water rights in The Golden State. The CME believes the futures market will help water users improve their risk management and better align supply and demand. What is more, there will be price transparency after years of high prices and uncertainty. Before the futures market, buying and selling water only occurred in the spot market. Buyers were hit with higher prices during dry years when more water is needed to grow crops and supply municipalities. CME futures transform this because now buyers offset the higher prices by betting on futures contracts, allowing them to pay less than they might have a year from now.
Water futures contracts on the CME are financially settled instead of requiring investors to accept physical delivery. They are through 2022, and each one represents 10 acre-feet of water or 3.26 million gallons. The first futures contract (NQH2O) had just two trades on its debut, and it finished its first trading session at 496 index points or $496 per acre-foot.
Bulls and Bears
What has been the reaction so far? It depends on who you ask.
Bulls contend that commodifying water on Wall Street will inevitably lead to better water supply management. Market analysts assert that the water futures market is in response to fears of scarcity. In the United States, many California farmers have faced intense shortages of water due to government mismanagement. Today, two billion people live in nations enduring water problems. It is estimated that two-thirds of the planet could suffer water shortages in as little as four years. Suffice it to say, the market stepped in and is attempting to rectify a state-created issue.
On the other hand, the bears aver that this could leave a vital resource vulnerable to a speculative bubble. Pedro Arrojo-Agudo, the United Nation’s special rapporteur on the human rights to safe drinking water and sanitation, thinks this “basic human right” is now under threat, noting that the vital resource “belongs to everyone.” And that could be the problem.
Thirsty for Free Markets
Legendary economist Murray Rothbard described the current state of water as communism since the state owns and controls the seas, lakes, rivers, aquifers, and other bodies of water. As we know from the environmentalists who lecture the planet every Earth Day, the results of communal rules have been catastrophic: fish are being exterminated, plastic is polluting the water at alarming rates, and a growing number of dead zones are forming across oceans. For whatever reason, the tree-hugging activists propose more government, even though that has been the source of the world’s innumerable challenges – environmental or otherwise. Look to California for an example of political ineptitude.
The state has endured on-again, off-again water shortages. For too long, water prices have been artificially beneath market-clearing prices, triggering various West Coast shortages. Californian farmers pay about $19 to deliver 326,000 gallons of water, compared to the national household average of $10,000. It needs to be emphasized that this is the cost of delivery – the water remains free.
With water commies designing more central planning interventions, shortages will inevitably strengthen. This is not unique to California. Across the U.S., many jurisdictions have witnessed water supply shortages over the years, including Atlanta, GA, and Orme, TN.
Should water trade at market rates, conservation would be encouraged, new water sources would be developed, and the resource would no longer experience the consequences of unlimited demand.
Put simply, water mandates that prices send markets scarcity signals and demand information. Indeed, not all water is created equal, but the market would likely produce various categories for the commodity and its prices. Keeping water free is neither sustainable nor practical – it never was. Eminent economist Walter Block wrote in his book, Water Capitalism:
“As a result we have oil spills, depletion of fish stocks, threatened extinction of some species (e.g., whales), shark attacks, polluted and dried-up rivers, misallocated water, unsafe boating, piracy, and other indices of economic disarray which, if they had occurred on the land, would have been more easily identified as the result of the tragedy of the commons and/or government ownership and mismanagement.”
The global economy has commodified nearly every natural resource, from grain to metal to oil. Entire industries have been created, multi-billion-dollar companies formed, and consumers’ living standards have improved because of commodity trading. Is the world better off or worse off because of it? Take a gander inside your refrigerator, gape at your computer, and drive your car. You will find the answer.
Read more from Andrew Moran.