California is not running out of water, it is running out of cheap water: report

May 18, 2015 |

In California, an analysis by Lux Research has concluded that “California isn’t running out of water. It’s running out of cheap water.” The drought damage is estimated as $2.2 billion, which is significant, but hardly the “end of growth” for California’s $2.2 trillion economy.

The problem for businesses, however, is that cheap water jeopardizes their water security. Executives need visibility into the issue and strategies to manage it, but unfortunately, the slow policy response and inconsistent price signals slow adaptation and innovation.

It starts with a very basic problem of ‘metrics’. How do we measure water? Since agriculture accounts for the majority of the water usage, around 80%, the attention naturally focuses on this sector. In the absence of good metrics, the conversation drifted to esoteric metrics such as “gallon per nut” (for almonds) to compare almonds and alfalfa. These two are the most frequently discussed crops; they occupy similar land acreage in the state. An acre of almonds consumes about 1,140 kgal of water per year while an acre of alfalfa consumes about 30% more. But there are real economic differences: Almonds generate about $6,000 of revenue per acre per year, compared to alfalfa’s $1,000. Therefore, the economic value of almonds is about $5.3 per kgal of water and alfalfa is only about $0.7 per kgal – almonds are eight times more valuable than alfalfa per unit of water.

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Category: Research

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