14 Jul 2008

Drought in Iraq

Iraq is facing drought due to low rainfall. Some say that things would be better if Iraqis had deeper wells or more aqueducts, but they miss the dynamic effects: Irrigated farming will expand as far as the system allows. When a drought arrives, the system -- "primative" or "advanced" -- tips into crisis, e.g., as in California now.

Unfortunately, there are even more stupid ideas:
But some Iraqis say the government should press harder to get more water from neighboring countries. A representative of Grand Ayatollah Ali al-Sistani, Iraq's most influential Shiite cleric, urged the government this week to sell oil at preferential prices in return for more access to water.
This is dumb because it encourages sweetheart deals. If I can sell oil for $140/bbl on the world market and then buy water for $140/gigaliter (I don't know the real price, but let's pretend), then why should I sell oil for $100/bbl and buy water for $100/GL?

This scheme only makes sense if either the water is not available unless it's traded for oil (weird, but possible) OR traders want to buy and sell from the same counterparty (i.e., NOT sell oil to A and buy water from B). This barter exchange gives the counterparty the option of re-selling the oil for cash (and sending that cash to Switzerland) while sending water that "nobody" owns. I call shenanigans!

Bottom Line: A water market must be open to all comers and settled in cash if it's to avoid the most-obvious distortions from corruption. Importing oil corruption into water (remember Oil-for-Food?) is not a good idea.

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