- The Washington Times - Friday, April 9, 2010

ANALYSIS/OPINION

This year already has seen a meaningful increase in oil prices, and expectations are for a further rise as the global economy rebounds. Ray Barros, CEO of Barros Trading Group, recently shared his view that if oil prices pull back from their current $86 range, odds are they will re-test the $84-$85 support level. Alongside that retrenchment, should favorable global economic data continue to emerge, we are likely to see greater investor sentiment for oil that could vault NYMEX crude to $99 per barrel.

But oil is not alone. These same factors have driven sizable recent increases in a variety of commodity prices - including those for gold, palladium, tin, zinc, aluminum and others. And earlier this week, prompted by watching a CNN report about ponds, it hit me anew that it also applies to the most basic commodity of all: The one oil doesn’t mix with.

Granted, I do my part to be environmentally friendly, including switching over from “disposable” plastic water bottles to a reusable water thermos, but I am hardly the greenest individual around. While I may be all wet on this, I would wager the vast majority of us take our water supply and the access we have to clean, drinkable water for granted.

Some quick Googling turned up some interesting and potentially shocking data. An article in the April 2010 edition of National Geographic revealed that while we live on a planet that is covered in water, 97 percent of it is salty and nearly 2 percent is snow and ice. That leaves 1 percent to tend to our agricultural needs, to assist our power generation, and to provide for household drinking and bathing needs. In that 1 percent, the worlds 14,450 desalination plants produce 16 billion gallons of water daily. Per Harvard Business, by 2030, water supplies will satisfy only 60 percent of global demand - and less than 50 percent in many developing regions, where water supplies are already under stress. Governments will have to manage demand by raising the price of water or capping the amount users can draw.

In short, the looming problem here is one of scarcity and the ripple effects it will have. In a world where demand for water is on the road to outstripping supply, companies will struggle to find the water they need to run their businesses. We have already seen minor instances - in 2004, Pepsi and Coca-Cola closed plants in India whose local farmers and urban interests believed were competing with them for water. In 2007, a drought forced the Tennessee Valley Authority to reduce its hydropower generation by nearly a third. Some $300 million in power generation was lost.

More information and insight on this can be found from Global Water Intelligence as well as Water Industry News and other periodicals.

As always in this column, I attempt to try and turn these lemons into lemonade from a personal investing perspective. Well in this case, there are several ways to invest in water-related scarcity including using exchange-traded funds and into companies that directly and indirectly look to help solve the burgeoning problem.

Examples include PowerShares Global Water Portfolio and the Claymore S&P 500 Global Water Index. The latter one includes 50 of the largest publicly traded stocks from companies involved in some aspect of the water business around the world. More specifically, all stocks in this index are either water equipment and materials companies or water utilities and infrastructure companies. The PowerShares Global Water Portfolio is designed to track the performance of more than 30 companies engaged in the global water industry such as pump and filter manufacturers, water utilities, and irrigation equipment manufacturers.

Not surprisingly, both of these two investment vehicles have been strong performers over the past year and handily beat the return of the S&P 500 in that time.

Alternatives to these vehicles exist and in some respects I would caution there are too many options. Consider the layers of companies that serve the water industry, factor in the private and public institutions and then take this to a global perspective. Impossible to sift through, decipher and understand? No, but it would be a daunting and all-consuming task for the average person in my opinion. This is especially true when we consider that this should be a part of a well-rounded portfolio that requires ongoing examination, harvesting and pruning.

Chris Versace is director of research at Think 20/20 LLC, an independent research and corporate access firm based in Reston, Va. He can be reached at cversace@washingtontimes .com. At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.