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AIMkts-logoCalifornia is experiencing severe drought.  Even Rancho Santa Fe and other ritzy addresses are subject to water use restrictions.  When a natural resource becomes scarce, the incentives rise for investing in enterprises that redress or otherwise resolve the scarcity — hence, for example, investment flows into gas and oil when demand puts pressure on supplies.  So, what of redressing or resolving water scarcity in California?  In this brief commentary, natural resource specialist and investment executive  Jason Stevens takes issue with the perspective offered to investors regarding water problems in California by Jeff Benjamin in “Options to Invest in Innovative Technologies That Address Water Shortages Are Limited,” published on April 19, 2015 on the InvestmentNews website.

Benjamin briefly describes the California water shortage and Governor Brown’s call for voluntary reductions of 25% in water use.  Benjamin attributes the dearth of investment in “technology, engineering, and innovation” to address water shortages to a lack of urgency on the part of, among others, government. Click the link above to see the full article.

Jason Stevens’ comment:

The most efficient way to create a supply response in the water market and attract ‘technology, engineering, and innovation’ is to allow prices to rise and for legislators to move out of the way. The Governor tells people they need to take shorter showers and the article quotes an investment professional opining that the current drought ‘isn’t a long-term issue.’  Such views miss the core of the state’s challenge.  California is in the position it is because consumers have little financial incentive to conserve and both industry and investors are burdened by mandates (mostly environmental) and controlled prices.  As long as the industry is so heavily regulated, companies and investors will be slow to create solutions to water quality, waste, infrastructure, and allocation.  With less efficacy, new businesses have begun to circumvent California’s water legislation.

Investors may want to look for indirect ways to invest in water such as California agribusinesses with long-term reliable water supplies (including water rights) and infrastructure agreements.  Companies that can monetize the value of their water will likely benefit as scarcity issues eventually cause municipalities to raise prices or to permit prices to rise.

Jason Stevens is an Investment Executive with Sprott Global, a U.S. broker-dealer focused on natural resource sectors including precious metals, base metals, oil & gas, agriculture, water, and alternative energy.  Previously on this site, Jason discussed the fortunes of oil and gas.  Jason has also appeared as a guest on Accredited Investor Markets Radio.