Futures Trading: Another Threat To Our Right To Water

Categories

Clean Water

by Mia DiFelice

In late 2020, the Chicago Mercantile Exchange (CME) launched the first water futures market, called the Nasdaq Veles California Water Index Futures. This market allows financial speculators to literally gamble on the price of water. But how does that actually work? And what are the consequences?

Water Futures Open Water Rights To Gambling 

First, let’s start with water rights. Generally, states west of the Mississippi allocate water resources through a water rights system based on the doctrine of “first in time, first in right.” Because of the history of the West, those with the most senior water rights are usually those who use it for agricultural purposes. 

These rights are appropriative. Those who hold them have the legal right to divert water from its natural flow; for example, via crop irrigation. In California, as in other western states, rights holders can sell or lease the rights to use the water to others. 

The index that Nasdaq Veles created is a single number that estimates the prevailing price of water in California. This number changes as water prices change. It’s based on an algorithm and a supposedly representative list of transactions — both of which Nasdaq Veles keeps confidential.  

CME’s new market allows investors to bet on changes in the index. Investors do this by entering a futures contract. The buyer and seller of the contract bet on how the index price will change by a predetermined date in the future. The financial speculators who sell futures contracts hope the price goes down, so they get paid at that date. Those who buy futures contracts hope the price goes up, so they get paid at that date. 

When the contract period ends, neither the buyer nor seller will get any water or rights to water. Instead, the “winner” gets cash. They “win” the difference between the index price at the start of the contract and the price at the end. So if no actual water is changing hands, what harm can it do? Turns out, a lot.

Water Futures Are Bad News For Real-Life Water Access

Proponents of the market say that rather than a casino, the futures contracts will function more like insurance. Farmers who participate in the market can insulate themselves from volatile changes in water prices by securing another source of income.

But the water futures market has inherent risks. It opens up the doors for further commodification and privatization of water. It can reframe water not as it is — a basic human right and resource that should remain in the public trust — but rather as greedy speculators would like it to be — something to bet on, like oil or gold. And, in doing so, it opens up water to excessive speculation and market manipulation, with consequences on the price of actual water.

First, investors, especially if they have huge contracts and stand to make or lose a lot of money, may try to profit from the futures market by manipulating the underlying market for real-life water. A single investor is allowed to buy water futures contracts equal to 31% of the average annual water rights transactions. Market manipulation is rampant in other futures markets that are based on price indices. 

California is particularly vulnerable to market manipulation because it lacks price transparency for water rights transactions. This is even more concerning considering that the CME can keep the data and algorithm of its index secret, calling it “confidential business information.” The public has no way of knowing if the index is accurate.

Excessive speculation is the second way that the water futures market could lead to real world price hikes. The presence of many large speculators on the futures market could send price signals that the price of water will increase. So rights holders of real-life water may hoard their water in response. This would cause prices for water to rise. 

“You can’t put a value on water as you do with other commodities. Water belongs to everyone and is a public good. It is closely tied to all of our lives and livelihoods, and is an essential component to public health.

Pedro Arrojo-Agudo, Special Rapporteur on the human rights to safe drinking water and sanitation.

If prices rise, small farmers will be among the hardest hit because agricultural users are the largest sellers of water rights. High prices would make irrigation unaffordable for many small farmers. They’ll close up shop and sell their land, usually to big agribusinesses. That means more farmland consolidation and more profits and power to big corporations.

We Need The Future Of Water Act To Protect Our Water

Financial speculators should not be allowed to gamble on and profit off of drought in California. As droughts, wildfires and climate chaos threaten our water supplies, we need to protect this invaluable resource as a public trust, managed in the public interest.

Water futures will incentivize the rich to protect their interests in water. Meanwhile, everyone else will face increasingly scarce and unaffordable water. 

Fortunately, in March 2022, Sen. Elizabeth Warren and Rep. Ro Khanna introduced legislation to ban water futures trading. The Future of Water Act will ensure water is not a financial toy for speculators to play with, hurting families and small farmers in the process. Passing this legislation is an essential step to secure our human right to water.

Tell Congress to cosponsor the Future of Water Act!

Drilling Won’t Lower Gas Prices. Here’s What Will.

Categories

Climate and Energy

by Mia DiFelice
Editor’s Note: A version of this content originally appeared on Food & Water Action’s website (our affiliated organization) at an earlier date.

It’s the hallmark experience of summer 2022. You’re rolling down your local street, heat waves shimmering off the asphalt, breeze blowing through open car windows. But when you stop at the light, an impossible number catches your eye. Huge and stark, the sign proclaims “REGULAR: $4.95.” It was $4.70 just last week!

Gas prices have been rising for months. Experts first pointed to an unexpected, rapid demand as global COVID lockdowns lifted. Oil and gas corporations saw bankruptcies and negative gas prices in the worst months of the pandemic. But rather than respond to returned demand, industry titans doubled down on profits.

When Russia invaded Ukraine, countries around the world began sanctioning Russian oil. Eye-watering gas prices have piled onto a seemingly endless list of crises and pain points for consumers. 

So of course, gas has become a political tool that Republicans use to condemn the climate policies of the Biden administration. Pointing at the president is a convenient pretense as they defend the interests of fossil fuel corporations.

But media coverage of gas prices swings between incomplete, misleading and downright false. The truth is, gas prices have little to do with White House decisions, and there are few quick fixes.

Consumers — especially the most vulnerable — need relief. But that won’t come from more drilling, as many politicians are demanding. In fact, more drilling would keep us at the mercy of future oil shocks. And it would attach our economic and environmental health to an industry with a long history of volatility and corporate greed.

Let’s break it down. 

White hand pumps gas into a white car.

More Drilling Is Not A Quick Fix For Gas Prices

Citing economic principles of supply and demand, political pundits call for Biden to increase the U.S. oil supply — that is, to drill more. We need more gas than we’ve got, the logic goes. Prices have risen. If supply grows to meet demand, prices will drop.

This argument misses key facts. First, Biden is not blocking the flow of American oil. In fact, he’s opened the tap more than Trump. The current administration issued more than 3,500 drilling permits in 2020 alone; that’s a third more than during Trump’s first year. And under Biden, U.S. oil production has grown from 9.7 million barrels a day to 11.6 million.

Yet oil and gas corporations are staying away from new drilling projects. Currently, 4,400 approved and drilled wells have yet to produce oil. Oil and gas executives show no sign of ramping up production. 

High Gas Prices Are A Boon For Investors

Oil executives themselves have revealed the reason for their inaction — profits. The oil and gas industry is seeing record cash flow. In the first quarter of 2022, the five biggest fossil fuel companies made their highest profits in more than a decade. Last year, four major companies (Shell, BP, Chevron and Exxon) made $75 billion. 

Their investors are demanding more of that windfall. So, instead of investing record profits in more drilling infrastructure, oil corporations are sending money back to investors through stock buybacks and payouts. In a March poll, 59% of oil executives admitted that investor pressure for profit, not government regulation, is the real reason they’re not drilling.

But blabber about drilling misses the mark. And it’s not like we usually use lots of Russian oil that we’re now missing. Of all the petroleum products used in the U.S. in the last decade, only 2% were Russian imports. So how do Russian sanctions affect U.S. gas prices?

The Oil Market Is A Complex Rollercoaster

Oil is a global market, which means prices are set by global supply and demand. The market could be rocked by tons of factors outside of U.S. control. Factors like natural disasters near production centers, the whims of oil-producing states and war. Such events create uncertainty about the future of supply and demand, which leads to more volatile prices. On top of that, speculators and their fleet of AI routinely bet on the future of the oil market. When prices go up, investors see dollar signs — and the more money they put down, the higher prices fly. 

In 2021, the U.S. exported more oil than it imported for the first time. Our crude oil production is soaring to record highs. Yet the price we pay for oil has still fluctuated wildly over the past few years. We are still vulnerable to oil price shocks.

The additional drilling pundits have proposed are a drop in the bucket of global supply. Far more influential are international disasters that clog supply chains, worry investors and prevent new development. Domestic production won’t insulate the U.S. from the global oil market. In fact, if more of our economy ran on fossil fuels, it would make us even more vulnerable to turbulent markets.

Price Controls and Renewables Are Real Solutions to Rising Gas Prices 

In the short-term, our government can help consumers with two tools. First, price controls would keep gas prices low, especially for those who need it most. Our country’s dirty oil addiction should not hurt workers and families. Second, we need an export ban on gasoline and other fuels. Despite the current crisis, U.S. exports on gasoline and diesel are nearing record-highs. With such exports, corporations send our domestic supply to the highest bidder. This ramps up market prices for everyone — including those of us who depend on gas for daily life and work.

Looking ahead, we need long-term solutions that will get us off the oil market rollercoaster. That means ramping up renewable energy. Renewables will insulate us from global oil shocks much more than domestic drilling ever could. But we have to pick up the pace of development while stopping new oil and gas. Our infrastructure and investment decisions today will have ripple effects for decades. More drilling won’t help struggling Americans tomorrow or even this year — but it will lock us into a future of dangerous emissions, climate disasters and high prices. 

Help us fight misinformation on gas prices.