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The Most Important Infrastructure Trend in the World Today

By Chris Mayer, editor, Capital & Crisis
Sunday, September 14, 2008

The cover story grabbed me. "Running out of Water," cries out the latest issue of Scientific American. "Facing the Freshwater Crisis" reads the article inside the cover.

The basic gist of the story is the increasing shortage of clean fresh water for many people across the globe. As an investor, the word "shortage" has the same effect as the word "cookie" has for a dog. It always perks up the old ears.

Where there is scarcity, there is likely a way for an investor to make something of it. Over the last two-plus years, my readers have made good money in water stocks. We've got a long way to swim yet. As an investment trend, water is as big as anything.

Just a few weeks ago, I was in Vancouver, Canada – one of my favorite cities – for my publisher's ninth annual investment conference. (Canada is the most water-rich country in the world.) Among a star-studded lineup of speakers, I most looked forward to hearing what Tom Rooney had to say about water.

I've been researching water investments for years now... and I've met many people on the trails of the water crisis over the years. Rooney stands out as one of the most articulate and knowledgeable.

He has had a front-row seat. For a time, he was CEO of Insituform Technologies – a small water and sewer pipe rehab company. He's now managing partner at RCI Consulting and still as active as ever in the world of water. He spoke to the 900-plus attendees at the conference in Vancouver, and I'd like to share some of his insights with you.

He titled his talk Water... Why Some Call It the Next Oil. To give away Rooney's conclusion, the change from "worthless commodity to precious reality is an inevitable trend." Water and energy are intricately linked, which is a fact not widely appreciated in the bars and taverns of the common fellow.

We need energy to provide water and water to make energy. For example, it takes four gallons of water to produce one gallon of oil. And it takes anywhere from 4-800 gallons of water to make one gallon of ethanol. This is, I think, the ultimate dagger in the ethanol craze – it simply requires too much water during a time when water is becoming all the more dear.

But to the man on the street, water is cheap, and, therefore, of little concern. In the words of Rooney, water is "somewhere between free and your cable bill." But imagine how you might have felt 10 years ago, when oil was $13 per barrel, if someone told you that in 10 years, oil would fetch more than $140 per barrel. You wouldn't have believed it – and you would have missed out on massive gains in oil stocks.

We have the same scenario unfolding here. Rooney began with that familiar old couple, supply and demand. The latter is skyrocketing. It may not surprise you to learn that the rapid industrialization of China and India has some part to play. In short, these emerging market countries have a lot of catching up to do.

Water consumption in the U.S. is about 158 gallons per day, versus only 13 for emerging market countries. As emerging markets industrialize, so too their demand for water will rise. As they enjoy the jingle of extra change in their pockets, their diets shift to more meat and fewer grains. Water consumption per calorie can increase 1,000-fold as these populations make that shift.

As for supply, that, too, is tightening. We know that the planet has lots of water. The problem is that 97.5% of it is salt water. And of the remaining fresh water, some 80% of that is frozen.

Around the world, rivers are going dry and water tables are dropping with alarming speed. The Ogallala, a huge aquifer underlying Nebraska, is dropping two feet per year. In northern China, water tables are dropping three feet per year. It takes some 1,000 years to recharge these natural reservoirs – so once they are gone, they are gone for all practical purposes.

Beyond supply and demand, the infrastructure that brings us our water is failing. Here Rooney cited a Booz Allen Hamilton report that estimates that the world's infrastructure – power, water and transportation systems – will need a $41 trillion makeover. That figure means practically nothing: It's so big. But to put that in some kind of perspective, it is a total about equal to the value of all the stocks held in all the stock markets of the world.

The report also shows that water infrastructure needs are greater than all other infrastructure needs combined. Water infrastructure "is the single biggest infrastructure investment the world has ever made," Rooney said. "And it is the most untended infrastructure asset in the world."

All in all, "water is at a tipping point," Rooney said. "Supplies are strained, systems are failing and consumption is rising."

But it's not all gloom and doom. As investors, there are a number of ways to invest in water. "If you're an investor with water rights," Rooney opined, "you have something special." I agree. I've been long-time a fan of PICO Holdings because it owns water rights in the American Southwest. It's a keeper. Rooney noted that prices for water rights have increased 2.5-fold since 2005.

Good investing,We'll also need new transmission systems for water. Rooney talked about how T. Boone Pickens – the rich and famous oilman – is putting up a 300-mile pipeline in Texas, at a cost of some $3 billion, to carry water. Pickens is also an investor in water rights through his privately held company, Mesa Water. 

The threads are many and varied. I've only scratched the surface here. But it's good to revisit a big picture idea every now and then, to see what's changed. When it comes to water, the issue is becoming more urgent every day.

Chris Mayer

Editor's note: Chris Mayer is the editor of Capital & Crisis, a monthly advisory we consider required reading at DailyWealth. With Chris' research, you can always count on contrarian investment ideas you won't read about anywhere else. Click here to learn more about Capital & Crisis... and Chris' unusual strategy for collecting huge amounts of investment income.

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