The Panama Canal is internationally recognized as one of the world’s busiest and most crucial shipping routes. Completed in the early 20th century, the 80-kilometer waterway revolutionized global trade by providing a shorter and safer alternative to navigating around the southern tip of South America, saving shipping companies time and money [1]. The Panama Canal connects the Atlantic and Pacific Oceans and via the manmade Gatun Lake. At approximately 85 feet above sea level, Gatun Lake forms a major part of the Canal, carrying ships nearly halfway across the Isthmus of Panama [2]. For each ship, 200 million liters of freshwater is used to move it through the locks before being dumped into the sea [3]. The Canal is of strategic logistics importance for U.S cargo. More than $270 billion of U.S goods cross the Canal every year, representing 73% of the Canal’s traffic [4]. In 2022, approximately 36.2 million tons of corn, soybeans, barley, and wheat were transported through the Canal from the Atlantic to the Pacific Ocean, making grain the most transported commodity of the Canal after petroleum [5]. Recent concerns regarding the Canal’s operational capacity and future viability have emerged due to the persistent severe droughts impacting the region.
How Drought Affects the Mechanics of the Canal Over the past decade, Panama has experienced a rainfall deficit in six out of ten years [6]. The last period of intense drought in the Canal occurred in 2019-2020 [7]. Irregular rainfall patterns and fluctuations in water availability have increased pressure to conserve water by reducing shipping traffic and limiting the amount/weight of cargo allowed to pass. With recent water levels in Gatun Lake below normal, the Panama Canal Authority (PCA) has taken measures to conserve freshwater reserves. In June 2023, the PCA implemented restrictions on shipping traffic, including a maximum draft limit of 44.5 feet (which determines the depth that the vessel can sit in the water) as well reduced number of ships crossing the Canal, down from an average of 36 per day in 2022 to no more than 32 per day currently [8]. PCA indicates that allowing more transits could cause water levels to fall further at Gatun Lake. Higher Costs and Transit Times These new measures have raised concerns for the United States shipping industry and contributed to new logistics and cost considerations:
Customers and consumers can expect to see an increase in the cost of goods. A recent paper, “Shipping Costs and Inflation”, suggests resulting congestion and increased expenses will ultimately impact importers and consumers, extending beyond higher prices and potentially contributing to U.S. inflation [11]. The paper further indicates a 20% increase in shipping costs can raise the inflation rate by 0.15 percentage points one year later [12]. Looking Ahead In late July, the PCA announced that that it would be maintaining the draft of 44 feet for the next several months as well as limiting the transit of 32 vessels per day, because of the prolonged effects of the dry season likely through September 2024 [13]. Increased global shipping costs, extended delivery times, and backlogs, are expected to continue in the near term, albeit at a lower level than experienced during the COVID-19 pandemic [14]. Relief from the drought is unlikely as Panama waits for El Nino, which typically brings warmer-than-average temperatures [15]. Protecting the Gatun Lake watershed has emerged as a paramount objective for the PCA. If depleted, Canal operations would be severely disrupted, water would be scarce for Panama City and Colon’s drinking supply, and Panama’s agriculture sector would face with adverse impacts [16]. PCA has undertaken several initiatives to proactively work to mitigate this possibility including the Green Route Strategy and Water Management System Program which guide efforts for environmental management, energy efficiency, and sustainable development of the Panama Canal watershed and areas of responsibility [17]. At the same time, U.S companies have begun to plan for longer backlogs, and some have explored alternative logistics such as the 7-14 extra days through the Suez Canal to potentially lessen the impact on U.S. trade operations [18]. [1] The Panama Canal Embassy of Panama [2] The Panama Canal Shipping Wonders of the World [3] Drought-hit Panama Canal must ‘adapt or die’ as water levels drop Phys.Org (4 August 2023) [4] U.S. trade dominates Panama Canal traffic. New restrictions due to ‘severe’ drought are threatening the future of the shipping route CNBC (24 June 2023) [5] Panama Canal further limits ship depth World-Grain (22 June 2023) [6] The Reality of Water Panama Canal Authority [7] Panama Canal prepares for the impact of climate events Panama Canal Authority (6 June 2023) [8] Panama Canal Authority adapts to unprecedented challenges Panama Canal Authority (10 August 2023) [9] Drought-hit Panama Canal introducing draught limits for ships Supply Management (13 June 2023) [10] How to handle the Panama Canal’s basket of new surcharge adjustments Inchcape Shipping Services (13 January 2023) [11] Shipping costs and inflation ScienceDirect (February 2023) [12] Shipping costs and inflation ScienceDirect (February 2023) [13] Panama Canal maintains competitive draft for the following months Panama Canal Authority (25 July 2023) [14] The Fed's Inflation Fight Faces a New Challenge: A Dry Panama Canal Bloomberg (2 June 2023) [15] El Nino Earth Observatory (14 February 2017) [16] The Green Route Panama Canal Authority [17] Panama Canal to Reformulate Water Management System Program Tender Model Panama Canal Authority (28 June 2021) [18] Shippers Look For Alternatives As Panama Canal Delays Grow, Cost Mount OceanAir (11 August 2023) Written by Maria Boyer Comments are closed.
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