Deutsche Welle (English edition)
Why US investors are now betting on water
At the Chicago Mercantile Exchange, investors are now able to speculate on water prices. This practice, meant to help secure supplies for cities and farmers, has drawn criticism, as Sabrina Kessler reports from New York.
When Edgar Terry walks his fields in the morning, there's one thing on his mind: water. The 61year-old farmer owns 700 hectares (1,730 acres) of land — a total of 12 fields with bell pepper, strawberries, spinach, celery and cilantro that have to be watered all year round.
His family has run the Terry Farms for 126 years. This longestablished farming company in Ventura County is located about an hour's drive north of Los Angeles, California, where water is often scarce. "I think about water every day of the week, especially now because we're in a drought," Terry told DW.
Some 2,000 miles (2,320 kilometers) east of Ventura County, Chicago has set out to fight water scarcity. At the Chicago Mercantile Exchange (CME), the world's biggest futures exchange, investors usually speculate on assets such as oil, wood or aluminum.
Water futures added
But since early December, investors have been able to trade the Nasdaq Veles California Index, where the prices of water usage rights are reflected in so-called water futures. Futures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price.
What's important is that the buyer must purchase or the seller must sell the underlying asset at the set price, regardless of the current market price at the expiration date. Such contracts are meant to help farmers simplify their calculations.
Municipal companies and utilities could also stand to profit from water futures, the CME argues. In California where water is scarce, water prices often soar overnight because of wildfires or droughts.
Costs for the next six months can be estimated only roughly, as Nasdaq Senior Manager Patrick Wolf told Bloomberg. He's in charge of the futures in California, the United States' largest water market.
Farmers like Edgar Terry believe the Wall Street initiative might come in handy. When a drought is on the horizon, they could secure enough water in time at reasonable prices. Terry, who in a side job is a professor of finance at California Lutheran University, says the futures could enable him to secure today's
prices for tomorrow's supplies.
In neighboring Kern County, farmers have for decades aimed to use wastewater from oil and gas mining for their fields during protracted periods of drought. There, recycled water already accounts for up to 30% of the annual irrigation budget. According to the LA Times, oil giant Chevron alone delivered over 20 million gallons (76 million liters) of wastewater to farmers in Kern County in 2015.
Consumer risks
However, scientists and environmentalists have been warning of health hazards for consumers, because even after the purification process, traces of harmful chemicals such as arsenic as well as some poisonous substances and radioactive elements remain in the water.
But experts are likewise skeptical about water futures, saying it raises ethical questions about whether such an essential element for human life like water should be tradable at all.
"We need to think now about the potential direct and indirect negative consequences of treating water as an asset rather than a resource," the former chief executive of FIA Europe, Simon Puleston Jones, told the Financial Times. (FIA is the US Futures Industry Association). The expert fears prices may go up considerably, and speculation might occur, impacting the poor.
According to the United Nations, more than 2.2 billion people across the world lack access to clean drinking water. It fears that the situation will be exacerbated in the wake of water-price speculation instruments.
"I'm very concerned that water is now being treated as gold, oil and other commodities that are traded on the Wall Street futures market," said UN Special Rapporteur Pedro Arrojo-Aguda, adding that water futures trading jeopardizes the access to water as a human right.
Provoking a crisis?
Speculators have triggered food crises before. Between 2008 and 2010, hedge funds bet on rising cocoa prices and thus eventually drove up the price for cocoa beans by a staggering 150%. Financial speculators also contributed to the price of wheat and soybeans soaring in 2007 and 2008, which triggered famine and social unrest in developing countries.
But the Chicago exchange is trying to calm people down, saying the water futures would only be traded regionally and in small quantities and that the majority of all Californian water rights are in the hands of utilities anyway. In addition, it says, it's
all about "financially settled contracts," meaning that no water is flowing anywhere, as the only thing that really happens is cash settlements.
This is to prevent investors with large storage capacities from causing an artificial water scarcity in pursuit of profits from rising prices.
For farmers like Edgar Terry, water futures thus appear to be useless. "We need wet water, not paper water," he said. This is why he chooses to rely on his own initiative that he launched a couple of years ago to combat water scarcity — the Fox Canyon Groundwater Market, a local trading system for farmers.
That marketplace for selling and buying water is possible because the strict water usage rights and regulations in California are confined to water from rivers, creeks and lakes. But thanks to Terry, farmers can sell or pass on excess water they pump up from the ground of their own land. That is to say that the concept of trading water has long materialized there, albeit on a strictly regional level.
permit for the project in 2017. Operations were due to begin in 2023.
Why is it controversial?
Environmentalists, indigenous groups and ranchers have slammed the project over the years, pointing to the risk of oil spills and saying the pipeline was an abuse of their lands.
In 2018, a federal judge temporarily blocked construction, saying that the US government had not properly reviewed its environmental impact. Other lawsuits have repeatedly brought progress to a halt, earning Keystone XL the nickname "zombie pipeline."
Critics have also accused the project of failing to properly protect pipeline workers from COVID-19. Indigenous tribes and other rural communities located along the route said they feared workers would bring in the virus.
The oil was to be extracted from Alberta's tar sands, also known as oil sands, a mixture of sand, clay, water and a thick substance called bitumen. This extraction process is more costly and requires more energy than other oil sources.
"Tar sands are not compatible with a future that deals with climate change in any meaningful way," Charlie Kronick, a UK Greenpeace campaigner and oil industry analyst, told DW.
Why is Biden canceling Keystone XL?
Biden has been "against Keystone from the beginning," he said in an interview with US news outlet CNBC last May.
"It is tar sands that we don't need [and] that in fact is a very, very high pollutant," Biden said at the time.
Fighting climate change is set to be one of the key pillars of the Biden administration.
"A cry for survival comes from the planet itself,'' the president said in his inaugural address. "A cry that can't be any more desperate or any more clear now.''
"It's fair to say that once you're past COVID, climate is going to rank as high as anything on the priority agenda for the new administration," said Adam Zurofsky, the executive director of Rewiring America, a nonprofit dedicated to combating climate change through the electrification of the US economy. Particularly exciting to people working in this space is the Democratic president's intention to take "a whole government approach" to tackling climate change, Zurofsky told DW. This means "thinking about how the federal government can use all the tools at its disposal [...] to try to advance America|s standing and efforts to combat climate change."
How has Canada reacted?
Canceling the pipeline is likely to cause tension with the the neighbor to the north. Canada has the third-largest oil reserve in the world, and fossil fuel is the country's top export.
"For Canadians, we are talking about $100 billion in [annual] exports," from the pipeline, Alberta Premier Jason Kenney told the Agence France-Presse news agency on Monday, responding to rumors Biden would kill the project. "So this is a matter that touches on Canada's vital economic interests."
Dropping the project would kill jobs in both countries and would make the US more dependent on OPEC oil imports, he added.
In recent weeks, Canadian Prime Minister Justin Trudeau had spoken with Biden and other US officials to make a case for the pipeline.
"It makes things a little bit more uncomfortable for Trudeau in a domestic context," Ryan Katz-Rosene, a politics professor at the University of Ottawa, told AFP.
While Trudeau has styled himself as a champion of climate activism and is largely aligned with Biden politically, he has also promised to oversee the completion of multiple pipelines meant to bring Canadian oil to new markets.
Several Canadian politicians have criticized the move, arguing that the US was better off getting oil from its eco-conscious neighbor than the likes of Saudi Arabia or Russia. Zurofsky calls this line of arguing "a false choice."
"It assumes that oil is going to come out of the ground," he said. "And the argument on the climate side is that we should be doing everything we can to make that harder, make that more expensive, make that less likely, because that oil coming out of the ground is harmful to our environment and is costing us."
What happens now?
In a statement anticipating the news, TC Energy said it was "disappointed" with the decision and that construction would cease while the company considered how to proceed.
The province of Alberta has previously said it would consider selling pipe and materials from the project for scrap to recoup some of the financial losses. The province has invested more than $1 billion of taxpayer money in the project.
Litigation took place after Obama canceled the permit the first time, and there are a number of legal theories surrounding the fact that a permit was already issued, Ken Alex of the Center for Law, Energy & the Environment at University of California, Berkeley, told DW.
"The question is, for the proponents of the pipeline, given the time and cost involved in litigating the issue, and in light of the need to reduce demand for oil and gas, what happens to the market over that time. Is the investment worth it?"