It should turn water flasks into empty flasks, and then you can refill them at the river. Also, there should be an empty flask on the shelf inside the Baxter's home, so you should never run out of flasks.
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Then there is a small glitch :) The spell with which you gaze in the cauldron consumes the whole flask, and does not give an empty flask back. Thanks for the hint on the empty flasks in Baxter's home though. That allows me to continue.
Really liking the game. Light hearted jrpg that is on par with the Enix classics - just with a better story :)