Drought across the globe
Climate is having, and will continue to have, a huge impact on the global economy and global politics. This is being felt keenly across the globe this summer.
In Europe, extreme weather has been playing havoc with water supplies, leading to several countries formally declaring droughts in specific regions. Senior scientists at the European Commission have indicated that this year’s drought may be the worst the globe has seen for the last 500 years, and according to the European Drought Observatory, nearly half of Europe is under ‘warning’ conditions - meaning that they are suffering from a severe drought and a major soil moisture deficit. 17% of Europe has reached the threshold at which vegetation suffers, in some cases dying out or thinning.
The Horn of Africa is experiencing the worst drought in more than 40 years with more than 20 million people facing severe hunger in Ethiopia, Somalia and parts of Kenya. In addition to this, according to the National Integrated Drought Information System, more than 43% of the US was in drought at the end of July.
Climate change is expected to increase the risk of droughts in many vulnerable regions of the world, particularly those with rapid population growth, vulnerable populations, and challenges with food security.
The consequences for agriculture, food production and supply chains of this environmental disruption are profound and will have significant ramifications for politics and business.
Impact of drought on economy and business
The extreme weather, and drought is likely to have a large effect on agriculture, energy generation, food production and supply chains. This in turn will impact business - through financial losses, reduced revenue and increased costs.
Fundamentally, many countries will simply not have the means to maintain food production at the same levels as before if the quantity of water required to service agricultural produce is simply not there. The result is economic dislocation, global supply chain disruption, and ultimately less choice for consumers. At a time of rampant inflation globally, this may impact household budgets even further.
This will profoundly change our relationship with land and food, posing questions for how business can respond. We will need to grow more food with less land under more climate stress, whilst also changing our consumption habits to fit with this new reality. Business is in a great place to take advantage of these shifting sands, helping to accelerate the uptake of agricultural technology, such as drought and heat resistant seeds, solar powered irrigation systems which will make a huge difference to the transition.
Along with this, drought has a significant impact on energy production. Power generation often depends on water availability – either directly in the case of hydropower, or indirectly thanks to cooling systems for power generators. At a time when energy costs are skyrocketing across the globe, drought has exacerbated these problems. This means increasing costs to business across, particularly for those involved in energy-intensive industries.
Businesses will have to re-orient themselves to take into account this new reality, understanding both the global and the local implications. It will be necessary to ensure company supply chains are sufficiently robust to account for sudden and profound weather changes, minimizing their exposure.
Geopolitical implications
There are a significant economic security and geopolitical implications to the extreme weather. In a world in which conflict is rife, and instability and war are ongoing, many will be forced into a position in which they will have to source produce from countries that may seek to exploit the instability.
We can already see food production being used as a tool for economic coercion, with Russia making the export of grain from Ukraine extremely challenging. While not explicitly related to drought, countries may utilize drought to use the export of agricultural produce as a quid pro quo for political support on other geopolitical issues. This could end up having implications for businesses operating in certain countries, who may be caught up in the geopolitical wrangling.
Reflections from Edelman Global Advisory experts across the globe
USA
The US national drought monitor indicates that more than two-thirds of the country is in drought, ranging from abnormally dry conditions to exceptional drought. A study led by the University of California, Los Angeles (UCLA) found that ‘the drought that has enveloped southwestern North America for the past 22 years is the region’s driest ‘megadrought’ — defined as a drought lasting two decades or longer — since at least the year 800.’ The UCLA study indicated that the current drought would have been dry regardless of climate change, but not to the same extent.
Climate change is delivering extreme weather events. As a result of this, drought-stricken regions in the US are experiencing horrific storms that spark wildfires and these wildfires quickly burn thousands of acres of vegetation, destroying lives, livelihoods, and the environment. In a cruel twist of fate, the same extreme weather events also cause flooding in dry regions. Although they deliver a lot of water in a short amount of time, these storms do not make up for the deficit that years-long drought has created. Instead, many storms that follow drought-induced wildfires cause catastrophic flood damage in burn-scarred areas.
Drought conditions recently prompted U.S. officials to cut water allocations to several southwestern states in response to low water levels in the Colorado River. In California, federal and state officials have also restricted water deliveries for agriculture and urban use. As a result, many farmers and ranchers are receiving no water deliveries from federal or state water projects; and local water agencies have mandated significant water conservation measures, including restricting all outdoor watering.
The potential impacts on business of these extreme weather events are profound. Almost one-third of the area in the domestic United States is in severe-to-exceptional drought conditions that are destroying oncerobust agricultural economies. In California’s Central Valley, one of the most prolific growing regions in the world, the drought has forced farmers to fallow fields and remove ‘permanent’ crops that have been in production for generations. Many growers predict that their operations will not survive the current drought conditions, which has already caused a significant gap in the supply of some products for domestic and international use.
According to the California Farm Water Coalition, over 80% of the United States’ fruits, nuts and vegetables are grown west of the Rockies. The drought has significantly impacted the Western U.S. billion-dollar agriculture industry. Officials of the Westlands Water District in the Central Valley, the state’s most important agricultural region, say roughly a third of the 600,000 farmland acres there are being left unplanted this year because of water shortages.
The political impacts of drought are being felt in the US system - primarily focusing on water restrictions and water storage. This month, President Joe Biden signed into law the bi-partisan Inflation Reduction Act, which includes $4 billion in funding to help mitigate the economic impacts of drought. The money will be used to compensate farmers who voluntarily reduce their water deliveries from the Colorado River under short-term or multi-year agreements.
Also in the US, state and federal regulations have made it almost impossible to construct new reservoirs for water storage or hydropower. However, the ongoing drought has renewed interest in storing water during infrequent wet periods, to use during dry ones. Political support is leaning towards new water storage solutions, such as pumping water into the ground.
In some regions of the US, drought conditions have contributed to over-pumping of underground water basins, rendering them too contaminated or dry to use. This situation has caused entire communities to rely on water that is trucked in or delivered in bottles. In California alone, the world’s 5th largest economy, hundreds of thousands of people do not have ready access to clean, safe water. Highly charged politics around groundwater use are playing out in courtrooms and in groundwater management legislation.
Europe
Political repercussions are being felt across the European continent, where member states in the EU are grappling with the extended drought. This has impacted France and Germany in particular, where both the Rhine and Loire rivers are at record lows.
In Germany, this has led to the government proposing a national water strategy which is set for adoption by the end of the year to ensure the long-term supply of drinking water. It also aims to ensure clean water supplies and help the country better adapt infrastructure. As part of this adaptation, water management will become an essential element of urban development. For instance, the government has pledged EUR 4bn over the next 5 years for so-called ‘sponge cities’ designed to encourage developments which catch and store as much water as possible.
France has also taken steps to address the worsening situation, most notably with the activation of a specialized crisis unit in early August to monitor the drought and propose initiatives. Most recently this has led the government to announce emergency measures to help farmers and livestock breeders weather the drought – including support for perennial crops like berries, grasslands, and an additional EUR 1.5bn towards increasing agricultural assistance for livestock fodder and other agricultural inputs.
Geopolitically, this is also having wide ranging impacts in the EU and in Switzerland, most notably on shipping and energy. On the Rhine, boats must be lightened by a third in order to avoid being grounded, and in France nearly 600km of canals are closed, particularly in the Grand Est and Burgundy, severely affecting shipping – which also means that fuel transport is being restricted to coal and gas powerplants.
The magnitude of the simultaneous drought and geopolitical crisis has led French President Emmanuel Macron to warn of tough months ahead as the world faces a possible ‘end of abundance’.
As result of low hydropower levels Norway decided to lower its energy exports to its Scandinavian neighbours leading to accusations of selfishness.
Beyond the EU and in the UK, drought has also been profoundly impacting the political scene. The Environment Agency has declared that vast swathes of the country are in drought, which has led to hosepipe bans in several areas.
This has led to renewed political debate about the amount of water lost to leaks from water companies. It is estimated that around 3bn litres of water are lost every day. Any forthcoming UK Government may look at the impact of this, and what can be done to invest in preventing such leaks. Current Environment Secretary George Eustice has proposed a water ‘national grid’, which would use huge pipelines to connect reservoirs in higher rainfall areas, mainly in the west, to those more at risk of drought, mainly in the east. While Eustice is unlikely to be in position when the new Prime Minister comes into office, it’s possible that this idea is taken forward.
Latin America
Latin America is currently facing significant challenges due to the effects of climate change. Many countries are affected by droughts, whilst others are suffering from extreme rainfall. The World Meteorological Organization reports that rainfall in the region is decreasing in general, but when there are precipitation events, they are extreme.
Droughts jeopardize crops, their transportation and the operation of some critical industries. In South America, the Paraná-Plata basin in Brazil and Argentina has experienced the worst drought since 1944, mainly affecting soybean and corn crops. As a result, the export of agricultural products has decreased by 80% due to the drought in the rivers.
In the north of Mexico (where Monterey, the industrial capital of the country, is located), the local population is experiencing one of its worst droughts, impeding the normal operation of industries such as the brewing industry. Mexico has recently signed a decree declaring a state of water crisis as a matter of national security.
In the context of high inequality in Latin America, the climate crisis directly affects the most vulnerable populations, leading to food insecurity, which is exacerbated by the restriction of access to water due to shortages. Access to electricity is also affected, considering that 45% of the energy produced in the region comes from water sources.
In addition, a race for investment in warning systems and water development tools is becoming more intense. Chile, for example, is developing a condensation system to produce water. However, given the problems of the global economic crisis and a lack of awareness, funds for development and innovation in this area are limited, meaning the problems are not being dealt with sufficiently.
Asia and the Pacific
China and India are the major countries suffering from drought this year in Asia and the Pacific. In Australia, climate disorder caused floods while some parts of the country are still exposed to rainfall deficiencies. The drought situation in Southeast Asia has marginally improved this year, but from a longterm perspective the region is still under threat from drought.
Using China as an example - the drought is particularly bad in the Yangtze River basin, which comprises a fifth of the total area of China and contains a third of China’s population. In July, the basin had seen 48% lower than average rainfall - the lowest since 1961. From July 1st to August 15th this year, the cumulative rainfall in major cities in the Basin was at least 50% lower than the same period of the previous year, causing the Yangtze River to dry up in parts.
The drought is clearly impacting on the economic and business prospects of the region. Supply chains in China have been disrupted, and power generation is suffering. Due to the power shortage caused by drought, factories of some famous electronics brands or auto parts suppliers had to shut down for a few days as per government’s request. One document spreading on social media showed a top Electric Vehicle brand based in Shanghai under pressure for lack of parts.
The Ministry of Water Resources said in a notice that the drought throughout the Yangtze River Basin was ‘adversely affecting drinking water security of rural people and livestock, and the growth of crops’. The Basin is the major rice producing area, posing some risk to food production.
The seismic impact of extreme weather in the region has been seen just this week, with the extreme flooding in Pakistan. At the time of writing, the devastating flash floods have killed at least 1136 people, and according to the Pakistani Climate Minister, around a third of the country is submerged in water. The UN Secretary General has declared South Asia a ‘climate crisis hotspot’ and called for humanitarian action to support the people of Pakistan.
Tragically, extreme weather events such as this will become a feature of our global climate, with areas such as South Asia very exposed.
What next?
The impact of climate change on our economy is only going to get more profound. According to the UN, by 2030, an estimated 700 million people will be at risk of being displaced by drought, by 2040, an estimated one in four children will live in areas with extreme water shortages and by 2050, up to 216 million people could be forced to migrate, largely due to drought in combination with other factors including water scarcity, declining crop productivity, sea-level rise, and overpopulation.
It’s clear that this is now a feature of our geopolitical environment, and politics, business and technological innovation will have to keep pace with it.
