Image: Bottled water © Grove Pashley, Corbis

Economics professors love to haze dewy-eyed freshmen with the diamond-water paradox.

It goes like this: Why, if water is so vital to life, is it essentially free? While diamonds, merely rocks with aesthetic qualities, cost a fortune. You can die of thirst. But you won't die if you don't have sparkly things on your fingers.

The answer, of course, is water is nearly free because it's plentiful, while diamonds are prized for their rarity. But if all the wells were to run dry, you'd happily trade all your worldly possessions for a single glass of water. It's all about survival.

Here's the rub: As a consequence of of population growth, industry and agriculture, fresh, clean water is about to become a lot harder to find. Sure, most of the world's surface is covered in the wet stuff. But 97% of it is full of salt. And most of the remaining 3% is frozen in glaciers or dusting the tops of mountains. Of what remains, a tiny amount is easily accessible in freshwater lakes, rivers and reservoirs.

The rest is held in ancient underground reserves such as the Ogallala Aquifer beneath America's heartland. And like fossil fuels, it is essentially a nonrenewable resource that is being rapidly depleted. That's because this "fossil water" is being extracted much faster than it's being replenished by rainfall.

Image: Anthony Mirhaydari

Anthony Mirhaydari

The law of supply and demand makes this a scarcity story, just like copper, crude oil and gold. But unlike all of those resources, there is no substitute for clean water.

In an era of alternative investments, with even staid portfolio managers looking at things like timberland and physical gold as they fight a decade of flat returns in the stock market and ultralow yields in the bond market, water could be the next great commoditiy play.

And unlike those who invest in diamonds or gold, a water investor will never have to justify the practicality of his investments. It's as simple as this: You drink it or you die. The stakes couldn't be higher. Ismail Serageldin, the World Bank's leading environment expert, warned that the "wars of the 21st century will be fought over water."

First, I'll outline the scope of the problem. Then, we'll look at ways to profit from what is likely to be the defining natural-resource problem of the next decade.

Water wars

To be sure, it's easy to suffer from crisis overload these days. Climate change. Crop failures. Tornadoes. Oil spills. The list goes on. But of all the issues, water is probably the most troubling yet underappreciated.

According to the United Nations, 50% of the global population will be living in water-stressed regions by 2030. Citigroup estimates that about one-third of the global population will not have access to adequate drinking water by 2025. Right now, 35% of the world's population, or 2.4 billion people, do not have access to safe drinking water and sanitation, the U.N. says.

These issues are poised to result in political turmoil, because more than 20 countries today get more than half their drinking water from rivers flowing out of neighboring countries, and more than 240 water basins around the world cross political borders. Major rivers like the Colorado and the Rio Grande, sucked dry by thirsty municipalities and farmers, now reach the ocean only during very wet years. Imagine the issues to be faced in the years to come along rivers like the Mekong, which flows through China, Burma, Laos, Thailand, Cambodia and Vietnam.

The problem is that the world is using too much. Water demand in the United States has tripled in the past 30 years while population has grown just 50%. Every 20 years, world water consumption doubles -- a growth rate twice that of population.

Water also plays a central role in the major investment themes set to play out in the decades to come: the rise of the emerging-market economies, increased demands on the world's arable land (a result of the spread of high-protein diets), and increased urbanization.

People, as they become wealthier, tend to use more water. Studies by the Environmental Protection Agency put average American household water consumption at about 100 to 150 gallons per day per person, by far the highest in the world. Compare that to an average of 74 gallons in Europe, just 35 gallons by the Swiss and 23 gallons by the Chinese. Africans use just 17 gallons. Now, think of all the double-head showers being installed in tony condos throughout China and India.

Next up is agriculture, by far the largest user of water at 70% of demand globally. Because of rising population and the need to raise and feed the cattle and poultry bound for the plates of increasingly carnivorous Asian gastronomes, the U.N. estimates that an additional 10% of farmland will be put into use by 2030. That will increase total water demand by 14%.

And finally, the great human migration into cites will further strain antiquated infrastructure in the developed world and force the construction of new facilities in the emerging world. In 1950, 29% of the world lived in cities. The U.N. estimates that number will be 60% by 2030.