Water and energy are inseparably linked resources that support human welfare. Water is needed to produce energy, and energy is used to clean, desalinate and transport water. To deal with anthropogenic pressure and climate change, long-term solutions to water scarcity and energy demand need to be developed jointly. Such strategies can be analyzed and developed by studying interconnections between the water and energy sectors. For this purpose, water allocation issues were implemented in an energy optimization model with a dedicated water module. The proposed model was used to assess an optimal "water-energy" mix considering opportunities for water reuse and non-conventional water use in the water-scarce Middle East region (i.e. Arabian Peninsula, Caucasus, Islamic republic of Iran, Near East). The results show that when the additional demand for electricity induced by water needs is not taken into account, electricity demand can be underestimated by nearly 40%. The integrated model allowed an analysis of water technology allocation and the use of non-conventional resources to compensate for water scarcity and enabled an analysis of the effect of higher irrigation efficiency. Finally, a water energy intensity index was computed and discussed relating to sustainability issues with the Water-Energy Capital concept, adapted from the natural capital theory. (C) 2012 Elsevier Ltd. All rights reserved.