'Not Just A Climate Issue': Water & Its Scarcity To Become Geopolitical And Economic Constraint In 2026, Says EY Report

(MENAFN- Live Mint) For much of the past three decades, carbon has been the main focus of climate policy. But as we head into 2026, a new crisis is tightening its grip: water scarcity. According to Ernst & Young's 2026 Geostrategic Outlook, water is no longer just an environmental issue. It is now at the heart of industrial strategy and global competition, and the centre of geopolitical and economic decision-making.

Water stress is already a reality. Nearly four billion people face severe water shortages for at least one month every year, making it a present-day baseline rather than a distant projection. Recent droughts and heatwaves in 2024 and 2025 have shown how quickly these shortages lead to higher food prices and political unrest.

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Climate change is accelerating these pressures by destabilising the global water cycle. Rising temperatures are altering precipitation patterns, increasing evaporation and intensifying both droughts and floods. The result is a world in which water systems are less predictable, just as demand is rising sharply across agriculture, industry, and rapidly expanding cities.

When digital ambition meets physical limits

What distinguishes the next phase of water stress, EY argues, is its direct link to geopolitical competition in the technology sector. The global race for digital sovereignty - spanning artificial intelligence, semiconductors and cloud infrastructure - is colliding with the finite limits of freshwater suppl.

Mining and processing critical minerals, manufacturing advanced chips and cooling hyperscale data centres all depend on large, reliable volumes of water. Increasingly, these investments are spreading into regions that are already water-stressed, forcing governments to make politically sensitive trade-offs between households, agriculture and strategically important industries.

The hidden water cost of chips and AI

Advanced semiconductor fabrication sits at the centre of this tension. Peer-reviewed research published in 2025 indicates that a large fabrication facility processing approximately 40,000 wafers per month can consume around 4.8 million gallons of water daily, even after extensive water recycling. Industry estimates often place leading-edge fabs in the“millions of gallons daily” range - comparable to the water use of a small town.

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Data centres pose a parallel challenge. Facilities relying on evaporative or hybrid cooling systems can require several million gallons of water per day, particularly when running energy-intensive AI workloads. Some operators are experimenting with waterless or chip-level cooling designs, which reduce freshwater consumption but often increase capital costs and electricity demand. The result is a three-way trade-off among water use, energy intensity, and infrastructure investment, a balance that varies sharply by geography.

Beyond farms and power plants: sectors under strain

While agriculture and energy remain central to water politics, disruption is spreading across a much wider range of industries.

Semiconductors and advanced manufacturing

The arid south-western United States illustrates how water can cap industrial growth. Long-running drought conditions have collided with rapid semiconductor expansion, pushing water permitting and groundwater rules to the centre of industrial policy.

In 2025, Arizona tightened groundwater regulations and approved mechanisms to shift water from agricultural to urban and industrial use. The policy pivot was designed to keep chip manufacturing viable - and highlighted how water access, not capital or technology, can become the binding constraint.

Data centres and cloud infrastructure

As AI adoption accelerates, local resistance to data-centre water use is growing. Communities in water-stressed regions are increasingly questioning whether industrial cooling should take precedence over residential water supply.

Some technology firms have pledged to become“water positive” or to deploy waterless cooling, but adoption remains uneven and often depends on economics rather than regulation.

Mining and critical minerals

Water stress is also intensifying in mineral-rich but arid regions. In Chile's Atacama salt flat, the epicentre of lithium expansion, disputes in 2024 and 2025 highlighted tensions between mining growth, Indigenous water rights and ecosystem protection. Even as companies shift toward desalinated seawater, local opposition persists, underscoring the collision between mineral security and water politics.

Textiles, food processing and urban development

Water-intensive textile clusters in South Asia have come under increasing scrutiny for their freshwater use and pollution, creating supply-chain risks for global apparel brands. Beverage and food-processing plants, which use water as both an input and a product, face similar pressures in stressed basins.

At the same time, urban expansion is increasingly constrained by assured water supply, reshaping real estate development and infrastructure planning.

Europe's quiet water vulnerability

Water stress is no longer confined to traditionally arid regions. Southern Europe is projected to experience structurally lower river flows as temperatures rise. Under warming scenarios, summer river volumes could decrease by up to 40 per cent in parts of the region, potentially increasing political risks associated with agriculture, hydropower generation and cross-border water sharing.

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These pressures are already visible. Farmers' protests across southern Europe in recent years have been driven not only by prices and regulation, but by shrinking water allocations during critical growing periods. As droughts and floods become more frequent, domestic pressure is mounting on governments to invest in water infrastructure and rethink long-standing management models.

Food insecurity, instability and migration

Water scarcity is a powerful amplifier of political instability. Reduced water availability lowers agricultural output and pushes up food prices - a well-established trigger for social unrest. In the Middle East and North Africa, already among the most water-stressed regions globally, worsening scarcity is expected to exacerbate food insecurity and heighten the risk of localised conflict, particularly in areas where governance is weak.

Water stress also contributes to migration. In conflict-affected regions such as Gaza, Sudan and Myanmar, damaged or contested water systems have compounded humanitarian crises, increasing displacement pressures that spill across borders.

Water as a geopolitical instrument

Recent events underscore how water is becoming a tool of statecraft rather than a background resource issue. During the 2025 India–Pakistan confrontation, the suspension of the Indus Waters Treaty demonstrated how quickly shared rivers can be weaponised in times of political tension.

Long-running disputes continue elsewhere. The Grand Ethiopian Renaissance Dam remains a focal point of tension between Ethiopia, Egypt and Sudan over Nile flows and energy security. In Asia, China's dam-building on the Brahmaputra and Mekong rivers has heightened concerns among downstream countries about seasonal flows and long-term water availability.

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Beyond these flashpoints, new geopolitical patterns are emerging. States investing heavily in desalination, recycling and water technology may gain strategic advantages, enabling them to host water-intensive industries and secure food and energy supplies. Others may face pressure to negotiate water-sharing arrangements, infrastructure partnerships or political concessions.

Desalination, infrastructure and cyber risk

Governments are increasingly treating water infrastructure as a strategic asset. Middle Eastern states are expanding desalination capacity to hedge against climate volatility, despite its high energy cost. At the same time, cyberattacks on water utilities have risen, pushing cybersecurity up the water-security agenda as digital control systems proliferate.

Arizona shows how water, not capital, is capping tech growth

The arid south-western United States offers one of the clearest real-world illustrations of how water scarcity is already constraining strategic industry. In Arizona, prolonged drought has collided with rapid expansion in semiconductor manufacturing, forcing water regulation to the centre of industrial policy.

Advanced semiconductor fabrication is among the most water-intensive manufacturing processes in the world. Peer-reviewed research published in 2025 shows that a large fabrication plant processing roughly 40,000 wafers per month can consume up to 4.8 million gallons of water per day, even after extensive recycling. On an annual basis, that equates to roughly 1.75 billion gallons of water - comparable to the total yearly consumption of a mid-sized town.

By comparison, Arizona's first approval under its new“ag-to-urban” groundwater transfer programme, announced in late 2025, freed up enough water to support 825 new homes, delivering savings of just over 437 million gallons per year. The contrast is stark: a single advanced chip fab can require four times more water annually than that landmark regulatory approval releases.

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The regulatory shift has material economic consequences. Arizona tightened groundwater rules in 2025 after halting automatic approvals for new developments that could not demonstrate a 100-year assured water supply. In response, state authorities began allowing agricultural water savings to be converted into urban and industrial credits - effectively rationing growth through water accounting rather than capital availability.

For chipmakers, the lesson is clear. Access to water rights and regulatory approval - not investment appetite or technological capability - is becoming the decisive factor in where fabs can be built or expanded. For policymakers, Arizona shows how water scarcity is already reshaping industrial strategy in real time, years before the most severe climate projections fully materialise.

What this means for business and policy

EY's 2026 Geostrategic Outlook urges governments and companies to integrate water risk into core strategic planning. Water scarcity can disrupt supply chains, halt production and undermine a company's social licence to operate if industrial use is seen to threaten household access or affordability. Regulatory restrictions on water use are becoming more common, raising both compliance and reputational risks.

Companies are increasingly expected to invest in water-efficient technologies, recycling and alternative cooling systems, often in collaboration with suppliers and local authorities. For governments, upgrading pipelines, expanding storage, tightening waste regulations and investing in innovation - including desalination - are no longer optional infrastructure choices, but prerequisites for economic resilience.

Read the complete EY report

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