Some of the natural resources we use every day are traded freely in the market economy, while others are heavily regulated and controlled by government agencies. History has shown us which structure is likely to lead to material progress and prosperity, and which to dwindling supplies. Economists and political commentators have been joking for over half a century that having a socialist government in charge of the Sahara desert would result in a shortage of sand.
This lighthearted skepticism of political control reminds us that there are no inherently “scarce” resources in nature – only perverse incentives that make resources less accessible, and thus more expensive, than they would otherwise be. We can apply this lesson to two key resources – oil and water. The way we’ve treated the former creates a compelling case for changing how we should handle the latter.
When a resource is privately owned and produced, the price reflects the temporary relationship between supply and demand. Price increases encourage conservation, but also incentivize new investment in production and use innovations, which together lead to lower prices. Government policies that stand in the way of that balancing process will produce shortages and ever-rising prices for consumers. Recall the energy rationing and price controls of the 1970s? The car lines, the fury of motorists, and how quickly it all disappeared when President Reagan finally freed gas prices?
Similarly, it was only about a decade ago that the news media was filled with stories of “peak oil,” and the inevitable decline of world petroleum production. We were supposedly running out of that precious resource, and many were insisting that the government do something to ensure that the remaining oil reserves were used more conservatively. Alternatively, we were told that ever-larger subsidies for the development of alternative fuels must be funded by taxpayers.
Those interventions turned out to be unnecessary. High prices solved most of the problem, encouraging entrepreneurs to find ways of exploiting a resource that was already widely known to exist – vast deposits of oil- and gas-bearing shale – in a cost-competitive way. Innovators like the late George P. Mitchell, “the father of fracking,” refined the existing technology of hydraulic fracturing and combined it with advances in horizontal drilling, opening up previously inaccessible sources of oil and natural gas. As fracking became a major technology, its costs kept dropping, bringing more and more oil on to the market. This has been great for oil consumers – both households and commercial users – but a bit painful for the petroleum industry players who drank the peak oil Kool-Aid and made the wrong bets. The oil peak that never was became the low-price oil glut we’re still experiencing today.
But the resource depletion crowd, modern followers of the original doomsday guru Thomas Malthus, never concede their folly. They’re now as hysterical as ever about the “water crisis.” We’re apparently running out of water everywhere, and massive new government programs are needed: subsidies, rationing, and taxpayer funding for major new infrastructure developments. And this time, unless we find ways of bringing the water commodity into the marketplace, they may prove right.
While underground pools of oil are generally privately owned and developed, underground pools of water (aquifers) remain common property, managed by regulations and government bureaucrats. In effect, groundwater is owned by the “public,” which means by everybody, which means no one has a significant incentive to find them, map their contours, or find creative new ways of extracting water efficiently.
Most of the earth’s potable water, outside of the polar ice caps, is contained in ground deposits – vastly more than is contained in rivers, lakes, and streams. Ironically, last month, a vast new aquifer was located in California by mining the seismology data that oil company geologists had produced in their endless search for that underground resource. “We used oil and gas records because the energy industry is the only industry that regularly drills deep into the Earth,” said Robert Jackson, one of the researchers who made the discovery.
Much of this water is deep underground and would be expensive to bring to the surface – expensive, that is, with current technology. If we’re to add that resource efficiently to the national water supply, we must harness the same ingenuity that has made oil and gas so plentiful. Specifically, we should allow firms and communities to acquire and trade property rights in this resource. Many currently exploited aquifers that are much nearer the surface would also benefit from private management. Extending the current provisions that create property rights in subsurface minerals, for example, would be a major move forward. A first step would be to allow ownership of aquifers under existing private property holdings via agreements with the landowners to “homestead” such ground water, acquiring the same rights they now hold for oil and gas.
Political control of natural resources weakens incentives for both conservation and increased production, severing the link between the conditions of today and the needs of tomorrow. A creative program to move this critical resource into the innovative private sphere could achieve for water what has been achieved for oil. It is time to begin that transformation.
Originally posted to Forbes.