That could work, though fuel availability needs to be considered. Fossil fuels in particular are being exhausted and the less of them is left, the harder it will be to extract them, and more expensive. Also the infrastructure to process and transport it - with transport being more dangerous prices rise again, and if the processing capacity is low, it would not help either.
Still, even if fuel is more expensive per unit, it might be more cheaper overall if the fuel efficiency is good enough.
Either way, if both water and fuel is expensive, likely only middle/upper-middle class at best could afford cars and such, leaving enough room for the use of animal-powered vehicles and machinery.
Although I would be cautious about making water too expensive, due to balancing living expenses with its other uses, and generally making it inferior to fuels.
On a side note, I feel we're starting to stray a bit into dieselpunk territory. Not that it's a bad thing, and the genres are similar enough I suppose.