We're all aware, by now, that we live on a planet of finite resources. As Californians, we're especially feeling the pinch when it comes to water. Given the LA Times's recent proclamation that California has only one year of water left, do we have enough water to permit more people to live in Palo Alto?
In short, the answer is yes. Letting more people live in Palo Alto is one of the most valuable things we can do with our water - and it may actually save water for California as a whole.
First, agricultural water usage vastly outstrips urban water usage. 80% of the state's water use by humans goes to agriculture, and only20% goes to urban areas.  The drought affects farmers far more than it does urban dwellers. If we could cut down on agricultural water usage, California could easily live within its means. In fact,an apartment dweller uses only as much water in a year as is required to grow $200 worth of almonds. 
Second, Palo Alto in particular is doing an incredible job of water conservation. Whether it be by installing low-flow toilets, watering their lawnsless, or even replacing lawns altogether with native plants,from 2000 to 2010, Palo Alto residents reduced their total water consumption by 22% ( 14,335 AF to 11,236 AF).  This is in spite of adding nearly ten percent to the population over the same decade.  There is no reason to believe that this trend cannot be continued. In fact, new buildings would be even better than old buildings, as old buildings would have been built with looser water efficiency standards in mind. And new apartment buildings would be best of all, as they would not have water-hungry lawns.
Third, refusing to build housing in Palo Alto simply pushes people to move elsewhere in the Bay Area. If adding urban residents is a problem, adding them to San Jose will be just as much of a problem as adding them to Palo Alto. Building a hundred new homes with large lawns in Gilroy will require more water than building one hundred new apartments in Palo Alto. You might say that people should simply stop moving to the Bay Area. That's unrealistic, and moreover, denying others the chance to take advantage of the special opportunities California has is not in line with our American values.
Fourth, California is not a monolithic ecosystem. It contains redwood forests, deserts, beaches, and farmland. The Bay Area receives much more rainwater than southern California. For example, San Francisco receives an average of 23.64 inches of rainfall per year. Los Angeles receives only 15.14 inches. Not only does the Bay Area receive more rain in general, some of its reservoirs are more full this year than they were last year. So long as we don't sell this water off to an almond farm, the Bay Area will be fine. 
The drought is a serious, serious issue. We must all conserve water,and we must be all conscious of how limited our resources really are. But one of the best ways to decrease water use AND simultaneously accommodate more people is to build more housing in our downtowns, near existing water infrastructure, especially multifamily housing. An urban planning policy that is sensitive to the drought should lead us to conclude that we should build more housing in the Bay Area, not less.