Drought saps the Panama Canal, disrupting global trade
By Peter Eavis
For over a century, the Panama Canal has provided a convenient way for ships to move between the Pacific and Atlantic Oceans, helping to speed up international trade.
But a drought has left the canal without enough water, which is used to raise and lower ships, forcing officials to slash the number of vessels they allow through. That has created expensive headaches for shipping companies and raised difficult questions about water use in Panama. The passage of one ship is estimated to consume as much water as half a million Panamanians use in one day.
“This is the worst we have seen in terms of disruption,” said Oystein Kalleklev, CEO of Avance Gas, which transports propane from the United States to Asia.
The problems at the Panama Canal, an engineering marvel that opened in 1914 and handles an estimated 5% of seaborne trade, is the latest example of how crucial parts of global supply chains can suddenly seize up. In 2021, one of the largest container ships ever built got stuck for days in the Suez Canal, choking off trade. And the huge demand for goods like surgical masks, home appliances and garden equipment during the pandemic strained supply chains to their breaking point.
In Panama, a lack of water has hampered canal operations in recent years, and some shipping experts say vessels may soon have to avoid the canal altogether if the problem gets worse. Fewer passages could deprive Panama’s government of tens of millions of dollars in annual revenue, push up the cost of shipping and increase greenhouse gas emissions when ships travel longer routes.
Though Panama has an equatorial climate that makes it one of the wettest countries, rainfall there has been 30% below average this year, causing water levels to plunge in the lakes that feed the canal and its mighty locks. The immediate cause is the El Nino climate phenomenon, which initially causes hotter and drier weather in Panama, but scientists believe that climate change may be prolonging dry spells and raising temperatures in the region.
Before the water problems, as many as 38 ships a day moved through the canal, which was built by the United States and remained under its control until 2000. The canal authority in July cut the average to 32 vessels, and this week announced new limits that are likely to lead to fewer than 30 passages a day. Further reductions could come if water levels remain low. The canal authority is also limiting how far a ship’s hull can go below the water, known as its draft, which significantly reduces the weight it can carry.
Container ships, which transport finished consumer goods, typically reserve passage well in advance, and have not faced long delays. But ships carrying bulk commodities generally don’t book passage.
This presents bulk shipping companies with an expensive calculus: They can risk waiting for days, pay a big fee to jump the line or avoid the canal entirely by taking a longer route.
Kalleklev said his company decided in August to pay $400,000 in a special auction to move a ship ahead in the queue, roughly doubling the total cost of using the canal. Other companies have paid more than $2 million, a cost they will sometimes bear to ensure ships don’t miss their next assignment. A portion of these extra costs will be passed on to consumers, already pummeled by inflation.
The drought presents tough choices for Panama’s leaders, who must balance the water needs of the canal with those of residents, over half of whom rely on the same sources of water that feed the canal.
The canal’s board recently proposed building a new reservoir in the Indio River to bolster the water supply and increase traffic through the canal, which generates more than 6% of Panama’s gross domestic product. Under the plan, the new water supply could allow for an additional 12 to 15 passages daily.
“In optimal terms, the canal can handle 38 transits per day, so 12 to 15 is a lot,” said Rodrigo Noriega, a lawyer and a columnist for Panama’s La Prensa newspaper.
Building the reservoir is expected to cost nearly $900 million, and the canal authority could start accepting bids from contractors toward the middle of next year with construction starting early in 2025. But that timeline could well be delayed; the construction of larger locks was completed two years late, in 2016, and that project was marred by cost disputes.
The new reservoir would also involve acquiring land that is protected by a 2006 law, and displace at least some of its inhabitants. Noriega said he expected Panama’s legislature to pass a law that would lift the ban on acquiring land. But he and others note that new water sources could also be built in other places.
Without a new water source, the canal could lose significant amounts of business. Other ocean routes are, of course, longer and more expensive, but they are less likely to have unpredictable delays. One alternative is to transport goods between Asia and the United States through the Suez Canal to the East Coast and Gulf Coast. Another is to ship goods from Asia to the West Coast ports — and then transport them overland by train or truck.
“In theory, something that offers a cheaper, shorter route should always be in favor, but it’s the uncertainty that can be a killer,” said Chris Rogers, head of supply chain research at S&P Global Market Intelligence.