Energy · Climate

Water Scarcity Emerges as a New Threat to Energy Security

Declining water resources due to climate change are increasingly impacting energy production, from hydropower to thermal plants and data centers, raising concerns about future energy security.

News AutomationCompiled 21:05 UTC · 1 min read

A dried-up reservoir highlights the growing connection between water scarcity and energy production.

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The Next Energy Crisis Could Be a Water Crisis

By Leonard Hyman & William Tilles - Aug 17, 2026, 3:00 PM CDT

Water scarcity is becoming an energy-security threat, affecting hydropower, thermal plants, grids and rapidly growing AI data centers.
Markets alone may not solve the problem, as water is essential, politically sensitive and constrained by climate and infrastructure.
Water could become a defining commodity of the 21st century, as supplies remain constrained while energy and industrial demand rises.

Sea Water

Strategic shortfalls? Maybe in getting cobalt out of the Congo or rare earth powders from China or natural gas from Russia or oil from the Persian Gulf? Or maybe something closer to home. Thanks to climate change (yes, just say it and hope the big boss doesn’t hear you), temperatures have risen, and rainfall patterns have changed dramatically. As an example of the consequences, the Colorado River’s flow has diminished and Lake Mead, its principal reservoir, has dropped to record low water levels. Aside from the obvious impact on water users in the Southwest, Hoover Dam, at the foot of Lake Mead, is a large power producer and one of its biggest customers is the giant Metropolitan Water District of California. ( In other words, the MWD stands to lose twice over: water and power).

European power producers have a different problem: not enough water in rivers to cool the power stations or carry fuel on barges. (Still another issue, if sea level rises, is the impact of that rise on coastal power stations. But that’s a little farther off.) And, in case you didn’t know, extremely hot weather affects the carrying capacity and operations of electricity transmission and distribution facilities. The big new electricity users, the AI centers, need water not only for their own operations but also for their power plants. Are we heading for markets in which power producers, power users, and everyone else will have to bid for a static or declining water supply? Power generation already accounts for roughly one third of water use in the USA. The Trump administration promotes still more water use by killing offshore wind projects (no freshwater needs) and encouraging, as replacements, nuclear and coal plants (big water users) as well as downplaying efforts to clean up water supply (less pollution increases usable water supply). So, the government is not here to help you. Maybe Ronald Reagan was right. Related: Libya Power Crisis Explodes as Grid Fails Again

Do we need a coordinated effort to look at the two industries in a systemic manner, to encourage inter-industry planning to assure water supply to the energy sector or to assure that the energy sector does not mess up everyone else’s water supply? Why not just let the market do it? Set prices and supply will come. The Field of Dreams approach. There are several reasons to think this will not work well:

First, higher prices won’t increase precipitation where and when needed, although it might discourage consumption, while encouraging efforts to reduce water losses and to reuse water and making desalination more economical. All that will help, but only so much.
Second, water is a necessity for the entire population, with no substitutes available, so raising prices or shifting resources to big users could produce damaging social consequences. Do politicians want their constituents to go without sufficient, affordable water?
Third, for the market solution to work, to efficiently allocate resources, prices must reflect all the long term costs (on the books of account, socially and environmentally) of production and usage, which we doubt is the case now, and would require politically fraught price hikes.
Fourth, the plethora of laws, jurisdictions and water suppliers with parochial interests will complicate and hinder any process of change. Nobody wants to give up long-held rights.

The electricity and water industries built their infrastructures around certain environmental assumptions that are no longer valid. They have not modified them sufficiently to take into account current and future conditions, in our view, from lack of money, or lack of urgency (the environment changed faster than expected) or ideological rigidity. Sooner or later, the chickens will come home to roost, but how soon?

We don’t see the Trump administration as bringing forth a coordinated approach to water or to the interaction of water and energy because that would involve admitting to the disruptive impact of climate change on both sectors. (The National Academies just removed a chapter on climate from its science manual for the courts. Apparently, the administration believes all that climate stuff is alarmist.) So, if you are in the energy sector (user or producer), just play it cautiously when planning for water supplies (don’t assume they will be there when you need them), expect political interference when the well runs dry, and don’t buy into those estimates based on 100-year average water conditions. You don’t need water issues to add to your problems. You will be busy enough dealing with those overheated, sagging transmission lines that traverse dry forests.

Let’s summarize the political and social issues this way:

A lot of people still haven’t made the connection that adequate supplies of electricity depend on adequate supplies of water. The present administration has no interest in pointing this out. There are really two separate themes here: the emerging environmental polycrisis (a water scarcity triggers electricity shortages in this case, or when the water gets too hot it won’t cool the plants, etc), and the second part is whether the pricing mechanism is even appropriate when there is no elasticity of demand. As we asked previously, what’s the appropriate price for electricity or heat when it’s the temperature hits 20 below zero, and your choice is to heat your house or literally freeze? As Herb Stein, the economist, said “If something cannot go on forever, it will stop.” That’s the situation here. Across the political spectrum, people are angry about the extra pollution, rising prices, loss of water etc. We don know how this will manifest itself politically, but we have enormous faith that some enterprising politician somewhere will try to use this pent up anger to gain popularity. We seem to be speed-running the excesses of the Gilded Age. The political reaction, if any, remains to be seen. But it surely is coming.

As investors, rather than gloomy economic or environmental prognosticators, though, we would reiterate a conclusion we shared with you before. Water in absolutely essential commodity whose supply remains unchanged while demand for it rises. You can’t beat that combination. Water will be the essential commodity of the 21st century, long after we quit looking for lithium.

By Leonard Hyman and William Tilles for Oilprice.com

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Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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