The big dry

By Bill Kaye-Blake 12/03/2013

We’re in a drought. Pastures are drying out, stock are stressed, and Wellington now has water restrictions (very mild water restrictions, it must be said).

The costs are being toted up. The figures being tossed around are in the $1 to $2 billion range (0.5% to 1.0% of GDP, roughly), which compares to agriculture being ~10% of GDP. If it hits lambing or breeding stock, the impacts could go on past this season. Given the weak economic recovery, there are concerns about moving back into recession.

The drought is, of course, a lack of water. But really, it’s a lack of insurance. By insurance, I mean information and infrastructure that protect us from downside risk. There isn’t enough of that around water in New Zealand, and no wonder. We haven’t needed it. But this year we do, and climate change is expected to increase the variability of weather and make ‘insurance’ more important.

Just for example…

You may remember that December was wet, so the hydro dams were spilling water over the Christmas break. If not, the great memory machine can help out. Lake Ohau, Lake Pukaki, Aviemore, Waitaki, Benmore, Tekapo, Roxburgh – all were spilling water. My wife — South Island born and bred — said that was a bad sign, that they’d be telling us to conserve power in the autumn as a result. Well, it’s not quite at that level, but it’s getting there.

One thing clearly missing was better information. The current drought is unusual:

The February rainfall into Lake Te Anau in the South Island was the lowest since records began 80 years ago, Meridian Energy said yesterday….

Going from full at the start of January to the 1992 level in March had never happened before, [Leyland] said.

The past wasn’t going to be a good guide to the future. If we can figure out better models of weather, precipitation, power generation, power usage, etc., then we can have better control over the lake levels. That’s going to cost money to figure out, but it’s like buying an insurance policy.

Another kind of insurance is increased storage. The country as a whole is not short of water. It is just in inconvenient places at inconvenient times. Storage and distribution can overcome those problems — it’s like money in the bank or an insurance policy against drought. As or if the variability of rainfall increase(s), the value of that insurance policy also increases.

There’s also the consumption side. Because we aren’t used to extended dry periods, we aren’t that efficient with water.We could be, though, and that’s something else we should figure out. Unfortunately, the consumption needs to be supply-sensitive. That is, we should reduce our consumption in dry years but correspondingly increase it in wet years when we can. That kind of flexibility will have a cost to it, just like buying insurance.

And, it really, really suggests we need some kind of rationing mechanism for water, so that people are using more or less of it depending on how much is around. Prices are economists’ first choice for rationing, because they allow people to make individual decisions about how much that water is worth to them.

We aren’t the only people to face uncertainty around water. We’re lucky — we tend to have lots of it. We just need to work out how to manage the variability. Other places — Australia, California, Israel — have to make do with less. That means we don’t even need to be particularly clever; we just need to learn from them. Think of it as importing insurance.