Water Scarcity & Desalination
TLDR: Water scarcity isn't a problem; bad governance is. Desalination is a competitive technology in some places but not everywhere.
Prerequisites: Georgism
At the end of The Big Short, the film informs the audience that Michael Burry, the hedge-fund manager that presciently identified the 2008 housing crisis before nearly anyone, is “focusing all of his trading on one commodity: water.” On the topic, language models like Claude will say things like “Water scarcity is a significant global challenge that affects billions of people.” Despite the Earth being covered in water, only about 0.5% is accessible and fresh.
In this essay I want to talk about desalination—the process of taking salt water (usually seawater) and purifying it into a drinkable form—a collection of techniques for obtaining potable water that have existed for thousands of years. For instance, Aristotle observed that a wax container submerged in sea water would act as a filter and eventually fill with potable water. Ancient sailors would hang sponges above boiling sea water to catch the vapor when their fresh stores ran dry.
But before we get into the economics of desalination, we need to understand the water scarcity that elevates it from a party trick to a multi-billion dollar industry.
An Abundance of Scarcity
In economic terms, “scarcity” doesn’t mean there isn’t much of something, but rather that people wish there was more of it. In this sense, hammers, cans of corn, and TV shows are all “scarce” even if they’re also abundant. We should expect all good things to be scarce, except in the rare cases where there is a natural occurrence of a huge, long-lasting (and/or replenishing) quantity of that thing, such as air. It used to be the case (in many places) that water was more like air, but we've long since moved to a point where it must be treated more like corn.
Most naturally occurring resources—lumber, gravel, pasture land, etc.—are scarce, and this is, in a sense, good. The scarcity of fresh water is a sign that we’ve grown, as a species, to the point where we’re actually getting use out of most of it! Needing to figure out how to efficiently allocate resources is normal and a sign that they’re not being wasted.
So when people say water scarcity is a “challenge” or “problem,” they’re rarely saying (if they’re at all informed) that the scarcity itself is an issue. Instead, their concern usually boils down to some combination of five things:
Poverty — As water moves from being naturally over-abundant to abundant-but-scarce, people will need to pay for water that they were previously getting for free. For most people, these costs are easily dealt with, but for the poorest people they can be significant. This, however, is less of a problem about water per se, and more of a problem with some people being extremely poor.
Depletion — In some places, water is drawn from a source such as an aquifer that refills more slowly than its used. Due to shortsightedness, people deplete the resource (sometimes causing subsidence), and then face the sudden shock of their wells running dry.
Drought — Another kind of sudden shock comes from the weather. Simple chaos can lead to unexpected droughts, especially with climates changing at an accelerated rate due to global warming.
Bad Governance — People living in places like Somalia have a hard time getting enough fresh water, not because of any fundamental barrier, but because Somalia is an extremely poor country sundered by civil war and mismanaged by a host of corrupt leaders. But even wealthy regions, like California, can face water problems that are largely due to poor governance.
Investment Opportunities — And lastly, as with any area where resources must be managed, there is ample work for managers (such as Michael Burry!) and opportunities for investment. This “problem” is more like business-as-usual for commodity traders and venture capitalists.
The solution to people being too poor to afford water is to get them money. The solution to the rest of these points is to aggressively tax natural resources and otherwise let the free market do its thing. Capitalist countries basically never experience famine, despite the potential for similar shocks, because savvy investors put in the work to make sure there’s lots of trade and food storage to smooth things out.
I’ve gone over land taxes before, but just to explicitly extend the idea to water rights: a river is a kind of “land” in the sense that it’s neither labor, nor capital. Nobody has a natural right to a river, and so anyone who consumes the waters is drawing from a collective resource. Collective resources should be collectively owned and rented via regularly occurring auctions. If water rights in California were allocated like this, a bunch of almond farmers would be enraged,1 but “the water crisis” would be solved.
When water is appropriately priced, people can make informed trade-offs about how much they can afford to use. During a disaster when there’s a huge shortage, this might mean not bathing or washing clothes. In more everyday contexts it might mean xeriscaping or growing sunflowers and beans instead of almonds and alfalfa.
But, in addition to reducing demand, we can increase supply. Enter: desalination.
Desalination Math
While getting water from a natural source like a well or river can be extremely cheap, getting fresh water from industrial-scale seawater desalination plants can also be remarkably affordable. The most efficient known method of artificially creating fresh water at scale is reverse osmosis, where salt water is forced through a semi-permeable membrane at high pressure. In theory, the economics of scale say that fixed, up-front costs can be spread out over a huge throughput, and the cost will increasingly be dominated by the input energy (or more precisely: exergy).
Salt water is higher entropy than separated salt and water. This is why if you put salt into fresh water it naturally dissolves. To reverse this process requires energy. How much? Well, the fundamental limit is determined by the Gibbs free energy of mixing. Estimates vary for seawater, due to dependance on factors like temperature and specific salt concentration, but a reasonable estimate is a nice, round 3e6 J/m^3.
One of the most efficient large-scale desalination plants in the world is Jubail 3A, launched in Saudi Arabia in 2023, which requires 1e7 Joules of energy per cubic meter of fresh water produced. This is only about 3.3 times the theoretical limit! And in Saudi Arabia, where energy is cheap, 1e7 J only costs about $0.14. For the Jubail 3A plant this is estimated at about 35% of total costs (~$0.40/m^3).
I think it’s impressive that we’re so close to the theoretical limit, both in the energy requirements and also how much of the total price is coming from the input energy!
Humans can easily survive on 4 liters of water (0.004 m^3) per day; desalinating an entire century of drinking water for one person would thus take about $60. We use water for many other things besides drinking, however, such as cooking and cleaning; the typical American (not household!) uses closer to 0.3 m^3/day, but this is still adds up to only around $44/year. Clearly affordable!
What about agriculture, which is where the majority of water is currently allocated? Alas, things get complicated here. For example, almost all agricultural data measures water added on top of regular rainfall, rather than total water per calorie of food. Different crops also have wildly different water needs, and it’s also not like the water suddenly disappears when used. A farm that’s lower in the watershed from a well-irrigated farm will require less input water as a result of naturally getting much of the excess water from the higher-up farmland.2
Nevertheless, a very rough estimate is that each person needs about ten times as much water to grow their food as they consume for domestic use. One order of magnitude isn’t enough to change the bottom line that desalinated water is an affordable option for nearly everyone, especially when factoring in that water is part of what we’re already paying for when we buy food.
Most places aren’t as energy-rich as Saudi Arabia, however! For instance, energy is about six times as expensive in California (one of the highest in the USA). With those higher energy costs, we’d be looking at $1.10/m^3, or $121 per person per year for standard American domestic consumption (holding non-energy costs fixed). Still affordable!
Jubail 3A took $650 million to build. I'm not sure sure if that's priced in, but let's assume not, and amortize it over 25 years of operating at 6e5 m^3/day for 350 days/year (to account for downtime). This only adds up to another $0.13 per cubic meter. Even if we double or triple the costs due to being unable to match Saudi efficiency,3 the price of desalinated water is still fairly low, in the scheme of things.
Rain and Hills
And yet, despite being an affordable way to produce water, desalination is usually not the best way to get water.
Desalination plants are more complex than many municipal water plants, and can easily cost more than twice as much to build and operate,4 not even counting energy costs. Desalination tends to be more efficient than private wells, thanks to economies of scale, but local wells (and other sources) have the huge advantage of not needing as much transport.
Water is heavy, and hard to pump uphill. For any community with a significant elevation, the economics of desalinating ocean water and pumping it up the mountain is usually probably going to be prohibitive, even if desalination were free. A rough back-of-the-envelope-calculation5 says it probably costs well over $1/m^3 to transport water from the ocean to a place like Las Vegas.
But note that even this cost isn't unthinkable—merely higher than the price of water obtained through natural sources. Precipitation gives us so much water that the marginal value of an additional source isn't particularly high. But if we needed to, we could, at the societal level, make as much water as we need and pipe it basically anywhere on Earth. The question is simply one of price.
Utopian Water Scarcity
Water is seen as scarce in Utopia, but also as very abundant. Better governance means water is appropriately priced, with significant taxes being fed into the same coffers as the other land taxes. Water is then sold on largely unrestricted,6 open markets. The natural incentive to sell water at premium prices during droughts effectively eliminates shortages.
Desalination plants are common in Utopia as an additional source of water for coastal cities, especially in regions with low energy prices or in arid places where weather patterns occasionally lead to high water prices. In inland and high-elevation regions, almost all water is obtained from precipitation, but these communities pay less than might be expected, since their wastewater can be filtered and returned to the watershed.
There's a general sense in Utopia that water treatment is an important technology to sustain large populations in a growing world.
I’m not a huge fan of paying off special interests, but it’s also possible to make this change a win-win by funneling most of the rent money to people who currently hold powerful water rights as compensation for losing that power.
This ceases to be true in coastal regions where the groundwater becomes tainted by seawater intrusion into the aquifer, which just reinforces the point that it’s hard to give a single number that captures reality well.
I'm trying to be charitable to the pessimists in the audience. In fact I think we can get costs even lower with skill, scale, and tech… assuming we don't waste huge quantities of money on things like union protectionism and endless red tape. Nevertheless, construction costs in Saudi Arabia are usually less than 50% than those of comparable projects in the USA (for a variety of reasons, some good, others dumb).
Throughput-scaled costs depend heavily on scale and technology. The New Delta Wastewater Treatment Plant in Egypt, which is the largest wastewater treatment plant in the world (~75e5 m^3/day) had a CAPEX of just $70 per cubic meter per day of capacity. Jubail 3A (~6e5 m^3/day), for reference, cost ~$1000 per m^3/day capacity. But then, the even smaller Katosi Water Treatment Plant in Uganda (~1.6e5 m^3/day) had a CAPEX of about $1400/(m^3/day). I was, unfortunately, not able to pin down an exact cost multiplier for desalination versus basic drinking water filtration. LMK if you have a source!
Las Vegas to the Pacific: ~5e5 meters
Construction and land costs for a meter of pipeline: ~$1e4
Amortized over 25 years: $2e8 per year
Elevation change (to highest point of pipe): >1e3 meters
Flow rate: ~4e8 m^3/year
Energy needs: >5e15 J/year
Energy price, including transmission: ~$1 per 1e7 J
Annual energy cost: >$5e8
Total annual costs: >$8e8
Total cost per cubic meter of water: >$2
Water, like electricity and internet, runs the risk of becoming a natural monopoly due to being a “utility.” Some government action is needed to ensure competition by forcing a distinction between infrastructure companies (who compete to build/manage/repair pipework) and water companies (who compete to push water to customers through the pipe).