Charles Wheelan, Ph.D. The Naked Economist

I've spent the last two weeks in the Middle East, mostly in Jordan and Israel. Among other challenges, these are both countries that have "problems with liquids," as one of my hosts explained. Neither country has any oil to speak of. And neither has enough water.

Indeed, one Jordanian businessman argued that the country is foolish to be exporting tomatoes and watermelons -- because the water they suck up and take with them out of the country is worth more than the fruit.

Down the Drain

After two weeks of talking about (and experiencing) scarce water, I've begun to wonder if the United States is paying nearly enough attention to water issues. Skyrocketing oil prices seem to have caught most of us off guard. Wouldn't it have been nice if we'd caught that one before prices soared to $100 a barrel? We have that chance with water.

There's plenty of evidence that the country already has water issues. Much of the Southeast was in drought all fall. In the Southwest, communities have been springing up and growing at a rate likely to outstrip the region's long-term water resources, at least if swimming pools and landscaped lawns in the desert remain the norm.

Even in the Great Lakes states the water issue has come up. I recently attended an academic presentation entitled "Is Water the Next Oil?" The speaker made two main points. First, water drawn from the Great Lakes is often not returned there, causing water levels to fall. Much runoff and sewage drain into other waterways, such as the Mississippi River, and ultimately run out sea.

Wake Up and Smell the Water

More provocatively, she asked what will happen when some parts of the country have enough water and others don't. When Nevada residents realize that there isn't enough water to support the recent housing boom, will U.S. taxpayers be asked to pipe new water to them? (Midwest voters won't like the expense of it, or having "their" Great Lakes piped out of town.) Think about that one for a while.

Perhaps the United States will never face major long-term water shortages. If that turns out to be the case, then great. We won't have to agonize over how much water we're sending out of the country every time we export a watermelon.

Or maybe we will. If you believe that there's a realistic chance that water is the next oil, then now is the time for the affected parties to wake up to that possibility:

Government: The most important role for government is to define the relevant property rights. Who "owns" the relevant water resources? Who gets to draw on them, and at what price?

The only thing worse than a scarce resource is a scarce resource with ambiguous property rights. Suppose Las Vegas does run short of water. Can Nevada demand a share of Lake Michigan?

There are secondary government policies that make sense in any case. Water ought to be priced sensibly, meaning: 1) Those who use more ought to pay more; and 2) Nobody ought to get subsidized rates -- not farmers, not water park owners, not anybody. If we don't price water as a scarce resource, then we'll pretty much ensure that no one will treat it as such.

I can't tell you how many times I've had conversations that go something like this:

Me: "You ought to pay the same price for water as everybody else."

Subsidized Water User: "What? Are you crazy? If I had to pay that much for water, I wouldn't be able to make any money growing rice here."

Me: "Perhaps it doesn't make much sense for you to be growing rice in the desert."

Subsidized Water User: "Do you know where I'm going to stick this irrigation pipe?"

And so on.

Business: What if the price of water doubled or tripled? That sounds unlikely, but so did oil at $90 or $100 a barrel. The underlying reality is that we're using more of a resource that exists in fixed supply. At a minimum, you should be asking how your business would change if you couldn't get unlimited cheap water. What opportunities would that create?

Environmentalists: Take 20 minutes off from the global warming campaign to think about water. There are many simple and inexpensive measures that can be taken at the local level to conserve water. For example, Chicago is considering permeable alleys, rather than asphalt, so that rain water will seep back into the water table instead of running into sewers that ultimately drain away from the city and Lake Michigan.

Investors: Do you want to own your own A380? Invent a cheaper way to desalinate and distribute sea water. That's what Israel and Jordan are trying to figure out right now. The rest of us could be there eventually.

Water on the Brain

Given the economic costs and political turmoil caused by the scarcity of oil over the past century, it would behoove us to take some time to think about the other precious liquid -- the one we really can't live without. Water -- it's clear liquid gold.