Water is weird. It’s absolutely vital to us as a human species and as a planet: we’re made of water, we consume a lot of water, and we can’t survive without water. It’s very precious to us. On the other hand, we live on a very wet planet: water exists for the most part in superabundance. It also never goes away: the total amount of water on the planet is more or less constant. Water is abundant, yet precious: we guard it jealously, while consuming it wastefully. What’s going on?

There must be some really good secrets about water, hiding in plain sight. So let’s go look for them.

In this essay, I’m going to talk about what makes water so interesting, and break it down in three sections:
1. What we really mean when we talk about water, and why we treat water so strangely.
2. How one characteristic of water, which has stayed the same throughout history, is about to change.
3. Guesses about the future: what will be different, given first-order and then second-order consequences.

—–
1. What we mean when we talk about water

A man in a desert and a sailor at sea will think about water very differently. They share the same Platonic ideal of water, but that’s about it: their attitudes, priorities and goals related to water will diverge quickly after that. So, when we consider water as it relates to agriculture, industry, transportation, human consumption, waste disposal and more, it’s worth forming a consistent mental model of water that we can use as a framework. One way to go about this is to think of the world’s water being in various buckets. For most of our purposes there are five important buckets that matter: the first four are buckets we can’t use, and the fifth one is the bucket we can use. Here they are:

The first bucket is water that’s got stuff in it. This is a very big bucket, because most of the world’s water lives here: in the ocean. And ocean water has got stuff in it – specifically, salt – that makes it unusable for most purposes. But it’s there, and there’s a lot of it. (Other types of water with stuff in it include polluted water, agricultural runoff, industrial output, and more. Most if it ends up going back into the ocean anyway. There’s also water with germs in it, which we’ll touch on a bit later.)

The second bucket is water that’s far away. This bucket is also pretty big. There’s a lot of water up in Canada, or frozen in ice caps, or held in groundwater deep beneath the ground, that is physically far away from us. Water’s molecular makeup and bulk make it physically difficult to move over long distances: without a way for it to get from there to here (like a river or a pipe), I cannot use it.

The third bucket is water that explicitly belongs to someone else. If you have a big tank of water on your farm, I’m not allowed to simply go take it and water my own farm. We’ve decided that those are the rules of the game.

The fourth bucket is water that’s expensive for some other reason. If I need to wash my dishes, I probably won’t use bottled Fiji Water to do so. Even if that water is a) clean, b) on hand and c) under my ownership, there are other components to its price tag (branding, the cool bottles, delivery service) that I am paying for as well. It may be usable for other purposes like drinking, but it is unusable for my current task.

And finally, the fifth bucket is what’s left: water that I can use. This water is a) clean, b) on hand, c) available for me to use, and d) not price-prohibitive for some other reason.  When we talk about water use, we are usually talking about drawing water from this bucket.

Most of the time, when we talk about water-related issues, we’re not actually talking about water – we’re talking about buckets. Through both natural and artificial means, humans have long enjoyed the benefits of having a steady stream of water moving from the unusable buckets to the usable buckets. Water moves from the ‘got stuff in it’ bucket to the ‘far away’ bucket through evaporation, condensation, and precipitation: the water cycle we learned about it school. It then moves from the ‘far away’ bucket to the ‘usable’ bucket through natural channels (rivers), and more recently artificial channels (pipes). But we’re increasingly running into problems: “I’m running out of water in the usable bucket. How can I move more water from the other buckets into this one?”

The first key question that I’m going to put out there, which we will revisit later on, is this: what are ways that we might be able to handle water in some other form that makes it easier to move from one bucket to another?

Keeping this idea in mind, let’s go through a few more things about water so that we can understand our current situation a bit bitter. Then, we’ll get back to our bucket question.

—–

We can learn a lot about water by taking a look at the way we’ve chosen to regulate it as a society. For the most part, usable water is abundantly available – except for where it isn’t. In Montreal, where I’m writing this, a giant river goes right by our doorstep. Every resident of Montreal could take all of the water we possibly could, and it wouldn’t make a dent in the St. Lawrence river because it’s just too huge. Since there’s plenty of water to go around, we effectively price it at zero: residents pay through a public utility, which sets prices for filtration and treatment but otherwise does not price your actual consumption of water as a raw public good. Agricultural and industrial consumers (who use the majority of our water in the first place) pay even less: they just stick their pipe in the river and take the water, first-come first-serve. And it actually works out ok – as long as the water keeps flowing.

In California, it’s another story. Water is a hot topic these days, because there isn’t enough to go around anymore: so many people showed up to take advantage that it’s actually getting scarce now. (That, and less water moving from the ‘far away’ bucket to the ‘usable’ bucket via melting snowpacks in the mountains.) So, what are we doing about this? We’ve collectively decided as a society that we can’t continue pricing water out west at zero. But how to reconcile that with the first-come, first-serve legacy of pipes sticking into rivers?

The solution we’ve come up with for the time being is water allotment: land comes with a certain amount of water rights, consumers get certain permissions to consume water for agricultural purposes, and they retain the ability to sell their water rights for certain prices. But really, water allotment is just a different way of doing first-come, first-serve: if you had the land first, you get the water. We’re still don’t dare to price water consumption directly; after all, if you tell people that something they’ve previously paid zero for is now going to become expensive, they get very upset. Instead, we turn to other expensive ways of getting water – notably, desalination – when we have no other palatable choice. And even then, it’s very hard to price the output of that desalination plant correctly: after all, it’s competing with free water that comes from the river.

Meanwhile, in other parts of the world, we have a different kind of bucket problem: the ‘got stuff in it’ bucket doesn’t mean salt water, it means contaminated water full of pathogens, bacteria and other bad things. Although salt and bacteria make water unusable for very different reasons, the buckets are actually pretty similar: your options are generally confined to ‘move water from the contaminated bucket to the usable bucket through filtration’, or ‘move other water from the far away bucket to the usable bucket through a river or a pipe.’ Furthermore, the contaminated but free bucket is still ‘competing’ with the expensive but usable bucket, which is why some developing countries still have high rates of infectious disease spread through contaminated drinking water. Either way, we’re dealing with a bucket problem where filtration costs dominate the equation.

One interesting idea that has emerged in dry places (notably Australia and Israel) is water markets. These make sense on a pretty basic level: if something is scarce and valuable, I should be able to buy, sell, and speculate on it. A few water markets have sprung up to scratch this itch: you can now bet on the price of one million cubic meters of water in southern Australia 15 years from now. But here’s the thing: although this type of speculation can be interesting for anybody who wants to make some bets, it doesn’t actually affect water consumption or availability all that much. Water, ironically, isn’t a very liquid asset. Today’s water markets do not actually make it any easier to move water from one bucket to another: it’s hard for the water-related bet to directly influence the water itself, and vice versa.

On both the regulation and liquidity level, there’s a very interesting parallel between water and another, very different public resource: our roads and highways. Growing up in Vermont, I never saw tolls or traffic jams: road capacity exists there in relative abundance, so we price traveling on the road at zero. This works fine, except for where it doesn’t: in cities, where road capacity is in very short supply. So what do we do? We attempt to price it with clumsy patchwork attempts: we toll roads in some places, and issue transport medallions in others. In areas of extreme scarcity, we suck it up and pay top dollar for other people to drive us around – a bit like how we pay for desalination when there isn’t much other choice. Ultimately, traffic persists because priced road usage is continually in conflict with unpriced road usage: no one wants to pay for something that they can get for free. And just like with water, we can speculate on future taxi medallion prices or toll road contracts, but it doesn’t really change anything significant: the state of traffic is a bit like the state of water. Most if it remains unpriced, and even when we try, the lack of liquidity makes it a hard nut to crack.

—-

2. Liquid Water

Now it’s time to revisit our earlier question: are there any ways we might be able to handle water in some other form that makes it easier to move between the buckets?

Consider this: you’re thirsty in California; I’m in Vermont and would like to help you out. What should I do? I’ve got plenty of water in my usable bucket, and that same water is in your ‘too far away’ bucket. I could physically send you some, but that’s very difficult. Alternately, I could send you some electricity – it’s a lot easier to move over long distances than water. If you have some way to turn electricity into usable water, i.e. use energy to move water from one bucket to another (desalination!), then that could work. The net result? I’ve moved water from your ‘far away’ bucket to your ‘usable’ bucket by handling it in the form of electricity. I could even go one step further: assuming you have some way to purchase electricity where you are in California, I could just send you some money. You could use that money to buy some electricity, and then make some water. I’ve just handled water in the form of money, a far more liquid asset than we were working with before.

The problem is that there’s a big transaction fee. Energy costs money, and desalination costs a lot of energy. (And money.) But something important has happened: by handling water in the form of money, I’ve turned an illiquid asset into a liquid one that can be easily bought, sold, and moved. For the right price, I can circumvent my bucket problem. Our follow-up questions are now clear: Could this transaction fee come down any time soon? And if it did, what would happen?

For water to become practically store-able and transferrable in the form of electricity or money, we’ll need to the transaction fee to come down substantially. It doesn’t necessarily need to come down to zero – but it has to get low enough that priced water can start to compete with unpriced water. (Think Uber becoming price-competitive with driving your own car. It doesn’t have to be free; it just has to get cheap enough.) There are two ways this could happen. The first is if energy gets cheaper. I won’t comment too much about that here (there’s enough going on as is) but if the costs of PV cells and other new sources keep dropping, in a few decades we could be living in a world with a different energy equation. The second and more pertinent mechanism would be a technological breakthrough in removing stuff from water. As it turns out, this might be happening right now.

Meet Graphene, the carbon monolayer wonder-material that everyone’s been fussing about for the last few years but no one has ostensibly figured out how to monetize yet. Graphene is a very curious material: it consists of pure carbon atoms, arranged in a planar sheet like a honeycomb lattice. It is strong, flexible, has amazing electrical conductive properties, and shouldn’t be terribly difficult to mass-produce in the long run. And it may have found its first killer application in something unexpected, and surprisingly mundane: acting as a molecular cheese cloth to strain the solutes out of water. As it turns out, if you punch holes into a graphene sheet at just the right size, it becomes a remarkably efficient sieve: water can be pushed through with little resistance, leaving behind everything else – salt, pollution, bacteria, whatever else. Over the last decade, while we’ve seen a smattering of academic publications about graphene-mediated water filtration, the gorilla in the room is one big company with big ambitions for this new technology: Lockheed Martin. A few years ago, Lockheed announced that they had developed a new graphene-based compound called Perforene that could filter and desalinate water much more efficiently than existing reverse-osmosis methods. If this technology comes anywhere close to living up to its potential, it will be – to be perfectly clear – a big f***ing deal.

If Perforene works and gets deployed at scale, what will be the immediate consequences? And, more interestingly, what will be the second-order consequences?

Let’s address this question by returning to our imperfect but still useful water vs. roads analogy. If water is like roads, and desalination is like Uber (a correctly priced but expensive solution), then Perforene is the driverless car. It’s the technological breakthrough that suddenly allows the fairly priced solution to get priced significantly lower. The first order consequences are pretty straightforward: Perforene will help us move water from the ‘stuff in it’ bucket to the usable bucket in places where we were doing so already. The market for Perforene, defined narrowly (and before applying second-order reasoning) is dry or developing areas where the usable water bucket is nearly empty – just like Uber is the most obvious ‘market’ for self-driving cars.

If all Perforene does is help bring water to dry places, it would already be a monumental achievement. But it also does something else that’s even bigger. Just as the self-driving car allows on-demand, access economy style transportation to compete with driving your own car on the highway that’s priced at zero, Perforene makes filtered water more competitive with the unpriced water coming out of the river. Since that water is coming from the ‘water that’s got stuff in it’ bucket, and its conversion fee is reasonable, we’ve just brought the transaction cost of storing water in the form of something else down to manageable levels. In that ‘something else’, whether it’s energy, money or even bits, water will be free from its physical constraints. It becomes what transportation is to Uber: less a car problem and more a math problem. Water becomes a liquid asset, for the first time ever.

—
3. Consequences of liquid water

So what does this mean? As we enter the world of guessing about the future, the real impacts are probably going to be felt in interesting places: just like the biggest impact of driverless cars won’t be in cars but rather in real estate, the true impact of Perforene will be in adjacent ecosystems like agriculture and industry. As I wrote about the other day, when constraints are removed from an ecosystem, the real change isn’t measured in ‘before-after’ terms, it’s what emerges when ecosystems rearrange themselves in the wake of that constraint. So how might agriculture rearrange itself? What constraint is removed, and what emerges in its wake?

Agricultural water consumption basically works like this: water, which starts out in a river or a lake, goes through a pipe and irrigates a farm. Food from the farm gets harvested, put on a truck, and brought to a grocery store, where it becomes dinner. And right now, there’s a constraint in the ecosystem that might change substantially when water becomes a storable, transferrable liquid asset. The constraint is that right now the farm has to be where the water is, which generally isn’t where the customers are. In the fight between ‘move the water’ or ‘move the food’, we’re choosing to move the food – which is kind of weird. But it’s a legitimate constraint: it’s too hard to irrigate farms with water from a ‘too far away’ bucket, so the farm and the water are forcibly integrated together into a unit. And as we often see in ecosystems, the remaining levels of the Ag-Stack, transport, storage & the local grocer, are all for the most part modular pieces.

If water becomes a modular, liquid asset that can be purchased and moved efficiently, some of our current compromises are no longer required: farming in the 21st century could look very different. Clayton Christensen’s Law of Conservation of Attractive Profits, a useful tool for understanding ecosystem rearrangement, would foresee the other layers of the stack getting integrated together. The truck and the grocery store, which used to be modular pieces, might merge together with the farm into vertically integrated food producers. This rearrangement of the agriculture ecosystem would be significant, and would have two large but logical consequences. The first would be: we’ll probably consume a lot more water than we used to. If water becomes a modular, liquid asset, we won’t start consuming less of it all of a sudden; in all likelihood, we’ll get thirstier. The second would be: food could actually get more expensive. And it’ll also get a lot more profitable. I would argue that this is a net good thing for the world: right now, when you buy a $1 head of lettuce that was grown thousands of miles away, there are a lot of negative externalities that are not being factored into that one dollar sticker price. Integrated food producers would mean higher food prices, but also a slight de-commodification of food that might go a long way towards a healthier relationship with food, water and our planet. So that could be good news.

It’s worth asking a final question: Where will the big profits be made here? What moats can be dug, and what new business models can be protected by those moats? 

When industries and ecosystems rearrange themselves, there are two places to look for moats that I can think of. One place – the Apple-style moat – is anywhere two or more layers of the stack can get integrated together in a way that’s hard for others to copy or compete with. In our case, we’d be looking for a vertically integrated food producer to emerge – think Whole Foods, on steroids – that figures out how integrated food production will work in the 21st century and beyond. (It’s marked ‘First moat opportunity’ in the picture, because I wasn’t really paying attention when I made the illustration. Sorry!) Food is exciting again, which is pretty cool. There’s another opportunity, though, that may be even more lucrative. It’s the Facebook-style moat: building a horizontal N of 1 company at the newly modularized level of the stack, which can dominate the entire layer. This company would effectively become the new water market: somewhere you would buy, sell, move and handle water in the form of money or bits. It’s where software could make a massive difference in global water management, allocation and pricing. It’s a company that could do a tremendous amount of good for the world, while also making a titanic amount of money. This company looks a lot like … wait for it …

Enron.

Yes, Enron – the company that became a caricature for corporate misbehaviour, whose executives partied at strip clubs while scamming California with brownouts, whose sheer contempt towards others was only matched by its contempt for accounting rules. And yet, it’s easy to forget that before it all came crashing down, Enron was an innovative company. What we’ve been talking about for water, they did for gas: abstracting away the molecules, turning it into a liquid asset, creating new markets, and bringing the whole industry out of the dark ages.  Just like Enron turned the fundamental units of the gas industry from pipes and wells to contracts and securities, one day we might deal with water in the form of bits. The barriers between the buckets will finally disappear, software will finish eating water, and it’ll be a whole new world.

—

Most people believe that water is scarce. In fact, it is abundant. Bucket conversion is what’s limited, not water itself.

Most people believe that we consume a lot of water. In fact, water is not really consumed at all. It just moves from one bucket to another.

Most people believe that water is a liquid substance but not a liquid asset. In fact, water becomes a liquid asset precisely when it is handled in non-liquid form.

Most people believe the future of water will be defined by restriction. In fact, the future of water will be defined by consumption – in a new, modular form.

Most people believe that water becomes profitable when it is scarce. In fact, the real profits will emerge when water becomes liquid and abundant.