Based on a regional input–output model, we developed a method to identify the relationships between production activities and the related water consumption, as well as the relationships established between different sectors concerning water resources (i.e. indirect consumption). This method is applied to Zhangye City, an arid area of northwestern China that is characterized by water shortages. Our results confirm that although Zhangye suffers from a serious water shortage, the city's economic structure is based on sectors that consume large quantities of water. On the one hand, food production and forestry consume large quantities of water, reflecting the large scale of these water-intensive forms of land use. On the other hand, the industrial and service sectors use a smaller amount of water directly in production, but to produce the intermediate inputs that they incorporate into their production processes, a high consumption of water is often necessary. At present, there is no evidence that the city alleviates its water scarcity by importing virtual water in the form of economic inputs produced in other regions, suggesting that planners should include both direct and indirect water consumption in their resource allocation planning.