In California water is a little bit fungible because of the California Aqueduct (and other aqueducts in the California water system), and because of some farmers' water rights claims over particular sources that might otherwise have been available to other users for other uses. But it's not completely fungible by any stretch of the imagination.

I don't know enough about the water system and the patterns of shortages to understand the prevalence of direct competition between sets of users. Of course a weird thing is that municipalities may have locked in particular sources, so there may not be anyone in competition with us at all (for example, we in San Francisco have near-exclusive access to Hetch Hetchy, so water demand from farmers elsewhere in the state isn't likely to threaten our municipal water supply, at least not very directly).

I guess I need to learn more about the extent to which different users actually compete with one another. Clearly livestock farmers in the Central Valley are in competition with crop farmers there for the same water resources, but their competition with city dwellers for sources of what might have been human drinking water is a thornier question.