A water crisis is coming, says Special Situations guru Chris Mayer.

Fresh water supplies are drying up in the US, says Chris, even as a growing population and increased biofuel production create more demand. And water is still too cheap, given it’s demand.

This could soon change. As shortages become more frequent, the price of water resources will go up. This makes the industry a promising investment play. More from Chris…

About 7,050 feet above sea level, high in the snowy Sierra Nevada Mountains, lies a little frozen meadow called Gin Flat. It got its name from a speak-easy that closed long ago. Nestled amid a forest of pine and cedar, a little scientific outpost measures snowfall — and has done so since the 1930s.

This is important work, because the melting snow from the Sierra Nevada provides water for millions of Californians. The size of the snowpack at Gin Flat gives us clues to how much water will flow from the mountains. With the data gathered at Gin Flat, scientists can divine the future of California’s water supply.

The latest reading this year is that the snowpack is only 67 percent of normal. So California looks like it will have more water troubles this year. “I have not seen a more serious water situation in my career,” opined one official. “And I’ve been doing this 30 years.” Some scientists think that we’re overstating the water content at Gin Flat by 20 percent or more. If so, we have even less water than we think.

Across the globe, scientists look to the world’s mountains and watch carefully. The areas most at risk of lack of fresh water include parts of the Middle East, southern Africa, the United States, South America and the Mediterranean.

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In this piece, we return to a familiar theme: the unfolding water crisis. The spur that drives me to revisit it once again is the thoughtful annual report of a publicly traded water company that has purchased water rights in the western United States. In the shareholder letter, the company’s CEO wrote: “Arguably, the most critical issue facing the Western United States is the availability of water to support continued population growth.”

Water scarcity in the West is not new, the CEO admits. At least since the time of Mark Twain, people have been fighting over it. (“Whiskey is for drinking and water is for fighting over,” goes the old saying often attributed to Twain.) But what’s new this time is the sheer amount of water needed to support the fastest and largest population growth in the union. In Arizona and Nevada (and Colorado and Idaho), population grows at a pace double the national average. Yet water is scarcest in these places.

For all that’s demanded of it, water is too cheap. The CEO continues: “Market prices [for water] have started to appreciate dramatically in recognition of the actual economic cost of developing new supplies.” Despite constant threats of shortages, there is a reluctance to allow the price of water to rise. Lastly, the company’s CEO chides the public’s irrational view of water as something that ought to be a “free” public resource, not subject to market forces.”

“Paradoxically, this same public is willing to pay exceptionally high prices for bottled water,” he writes, “rather than drink inexpensive tap water, in part due to the often mistaken belief that bottled water is safer to drink.” This water scarcity issue does not only affect America’s dry Western half. It’s a global issue affecting many other parts of the globe. In a water-constrained world, conserving water becomes top priority. Treating existing water supplies when new supplies are not available becomes especially important.

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As an investment idea, the water theme is not going away anytime soon. Many trends in energy and agriculture make the water situation only worse. Take a recent Tampa, Fla., development. Officials got a shock when the state’s first ethanol facility put in its request for water — 400,000 gallons per day! That instantly made it one of the top 10 consumers of water in Tampa, yet there are plans to double its capacity. All the while, Florida’s rivers and lakes are at or near record lows.

It’s madness, of course. But at least you can make it work for your portfolio by putting some money in the water resources arena. Maybe one day, people will quote the readings at Gin Flat — and its counterparts across the globe — as they do the Dow Jones industrial average.

Source: Gin Flat: The Next Dow Jones Industrial Average?