Here’s how to invest in the world’s most valuable commodity

For the past four years, California has been getting very little rain. Most of the state is now suffering from serious water shortages.

Agriculture a major employer has been hammered. The mains supply in some of the worst-hit towns has dried up, leaving residents to fill up from water tanks.

Things are so desperate that the state has even been forced to revise a gold-rush era law that allowed landowners unrestricted use of groundwater.

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This summer, governor Jerry Brown ordered an overall 25% cut in water use. Some areas are having to reduce consumption by a third. That means no daily showers in many areas.

California's case is extreme, but it's not alone. Eight other US states are in the grip of drought, while Brazil is still undergoing its worst water shortage in 80 years. China is also facing water shortages.

It all points to one thing water becoming an ever more valuable commodity

Why are we running out of water?

So why is this happening? One explanation is that global temperatures are rising. Whether you believe this is man-made, the result of some other trend, or a combination of the two, the general trend is for longer, hotter summers (I say general obviously it didn't apply here this year).

So that accounts partly for drought conditions or extreme weather events.

But the biggest issue is the fact that living standards are rising. That's a good thing, obviously, but higher economic growth and wealthier populations mean that more water is needed for food and industry, while people also use more water in their day-to-day lives.

At the poorer end of the global scale this means individuals being able to enjoy relatively reliable running water and regular showers (something that didn't become universal even in the US until after World War II). At the richer end, it means lush gardens and swimming pools in the desert.

There have been some efforts in the US to rein in the worst excesses. For instance, there's been a big movement in desert states such as Arizona and Nevada to encourage residents to give up their lawns for native plants.

However, there are limits as to what people will accept. Clearly it's unfair to tell people in developing countries that they can't enjoy the same things as those in richer countries.

And even if residential users can be persuaded to cut back, the demands of agriculture, which accounts for around 40% of freshwater use in the US and 80% in California, are far more significant sources of demand.

This means that you either need to find more freshwater, or more efficient ways of using the water we have.

Why desalination is more challenging than you might think

The traditional approach is desalination removing the salt from seawater. In the past this has involved boiling seawater and then condensing the water vapour produced.

However, in the past few decades a new approach has developed, which focuses on pushing the water through incredibly fine filters. This process reverse osmosis is generally more efficient than boiling and condensing, although the older method is still used in certain places.

China is planning a major desalination push, with the aim of quadrupling the amount of seawater it purifies within the next five years. Trouble is, this has its drawbacks. There are big concerns about the impact on marine life, both in terms of trapping fish in the filters and of returning leftover salt back to the sea.

There is also the problem of how to generate the huge amount of energy these plants need. However, the Saudis are now building the world's first solar-powered desalination plant in Al Khafji, due to come into operation by 2017, which might be one solution.

A cheaper, if slightly icky' alternative

A cheaper solution is to recycle freshwater, by filtering and treating sewage until all waste and impurities are removed. This wastewater contains far fewer soluble impurities (such as salt), so it can be much cheaper to render this water usable again rather than using desalination to clean saltwater.

The idea of drinking water that has been down someone else's toilet at some point may be hard to accept and there is still opposition but the end water is identical to the product produced in the "normal' way. As a result, the economic benefits are winning out, and California is starting to change its laws to allow towns and cities to use recycled water.

Indeed, Los Angeles and San Diego now get some of their supply from these methods. Recycled water is already starting to be used in agriculture and on golf courses (another major consumer of water).

Meanwhile, companies and organisations are turning their attention to smaller systems that can be used in individual homes. These systems are based on technology developed by Nasa for use on space missions. Sweden's Orbital Systems, for example, is already selling a system that claims to cut the amount of water used in a shower by 90%.

The tricky thing is working out the best way to profit from the various companies involved in the water industry. There are plenty of options, but some give you purer exposure than others.

MoneyWeek's regular contributor Jonathan Compton looked at one key aspect of the sector waste treatment in a recent issue of MoneyWeek magazine.

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