Here’s What California’s Historic Drought Will Do To The Economy

California drought
California’s Folsom Lake is 17% of its capacity REUTERS/ Robert Galbraith

It may be wet and chilly in the Northeast, but vast swaths of the country — particularly California — have seen seriously dry weather.

In fact, more than half of the lower 48 states are in dry or drought-like conditions, according to U.S. Trust’s Joseph Quinlan, and it’s enough to have him warning clients about the future of water scarcity.

“It’s also pretty dry in many parts of the world, with China, India, Australia, and the Middle East experiencing multiyear water challenges that threaten to slow or impair economic activity,” he writes.

In the near term, Societe Generale economist Aneta Markowska isn’t worried about the economic impact of California’s drought. From SocGen:

There are reasons to believe that this drought will have less severe implications. As shown on the first chart above, the recent drought was localised: while California experienced the driest conditions on record, most other parts of the country experienced normal or above-normal precipitation levels. In contrast, the 2012 drought was much more widespread, having extended through most of the Midwest (May-July) and Pacific Northwest (July- September). Adding up the agricultural output in the affected regions, 2012 appears to have been larger in scope. Based on the comparison, we estimate that the impact of the recent drought in California should not exceed 0.3%, and is likely to be closer to 0.2%.

Check out the map:

Drought conditions

In the context of investing, Quinlan says he’s bullish on the planet’s most precious commodity, water. From his note:

Given all the above, our favourite commodity play is not gold, oil, copper, wheat or even rare earth metals. It is something far more mundane but critical — it’s water. That may sound rather ironic given that most of the globe is covered in water. However, 97% of mother earth’s water supply is salty and therefore not fit for daily use. Of the remaining 3%, 2%, while considered fresh water, is locked in snow and ice. That leaves around 1% for human use — or for a global population of 6.5 billion heading for at least 8 billion in the next two decades. Without any doubt, water — two atoms of hydrogen joined to one of oxygen — is the world’s most precious commodity.

Water investments will be worth watching.