For more than a century, the Panama Canal has stood as a vital conduit for maritime traffic, facilitating the swift traversal between the Pacific and Atlantic Oceans, thereby expediting global trade flows.
However, an ongoing and severe drought has left the canal grappling with an acute water shortage. This vital water resource is indispensable for the raising and lowering of ships that navigate this engineering marvel, and as a consequence, authorities have been compelled to curtail the number of vessel transits. This predicament poses not only financial challenges for shipping companies but also thrusts complex questions into the limelight regarding water management in Panama. Remarkably, the passage of a single ship is estimated to consume as much water as half a million Panamanians utilize in a day.
Oystein Kalleklev, CEO of Avance Gas, a company engaged in propane transportation from the United States to Asia, observed, “This is the worst we have seen in terms of disruption.”
The Panama Canal, an iconic feat of engineering inaugurated in 1914 and handling an estimated 5% of global maritime trade, now stands as a poignant exemplar of how critical junctures in the world’s supply chains can abruptly disrupt global commerce. As we witnessed in 2021, when one of the largest container ships found itself stranded for days in the Suez Canal, global trade can be choked in an instant. Furthermore, the surging demand for various goods, such as surgical masks, household appliances, and garden equipment during the COVID-19 pandemic, exacerbated the strain on supply chains to an extent where they teetered on the brink of collapse.
Despite Panama’s equatorial climate, characterized by substantial rainfall, this year has witnessed a 30% reduction in precipitation, causing water levels in the lakes that nourish the canal and its formidable locks to plummet. The immediate factor behind this dire situation is the El Niño climate phenomenon, which initially ushers in hotter and drier conditions in Panama. However, scientists are now contemplating that climate change may be further extending these arid spells while elevating temperatures in the region.
The Panama Canal, which once witnessed up to 38 vessel transits daily, now finds itself limiting the average to 32 vessels, with recent announcements foreshadowing even fewer passages – fewer than 30 a day. If water levels continue to remain low, this figure could diminish further. Furthermore, the canal authority has imposed restrictions on how far a ship’s hull can dip below the waterline, known as its “draft,” substantially reducing the cargo capacity of these vessels.
For container ships, primarily tasked with transporting finished consumer products, pre-booking passages has averted any significant delays. Yet, for bulk commodity carriers, advanced reservations have not been commonplace. Consequently, bulk shipping enterprises confront a costly conundrum: either they must endure waiting times, pay substantial fees to expedite their transit, or circumvent the Panama Canal by embarking on longer journeys.
As an illustrative example, Avance Gas opted to pay $400,000 in a specialized auction in August to advance its ship’s transit, doubling the overall cost of using the canal. Other companies have resorted to paying upwards of $2 million to secure timely passages for their vessels, effectively passing these added expenses on to consumers already grappling with the throes of inflation.
The relatively limited impact of this predicament thus far can be attributed to the tepid economic climate in the United States, which has constrained the demand for imported goods.
Yet, it’s foreseeable that traffic through the canal will persist at diminished levels in the forthcoming months, with these curtailments aimed at conserving water resources, given the substantial quantities consumed when each ship traverses the canal’s locks during its 40-mile journey through Panama.
This dire scenario places Panama’s leaders in an unenviable position, requiring them to navigate the delicate equilibrium between the canal’s water requirements and those of the local populace. Over 50% of Panama’s residents rely on the same water sources that feed the canal, rendering the decision-making process even more intricate.
A proposal has emerged within the canal’s management, suggesting the construction of a new reservoir in the Indio River, aimed at augmenting the water supply and bolstering canal traffic. If implemented, this new water source could potentially add 12 to 15 daily transits, in contrast to the optimal capacity of 38. However, this endeavor comes with a staggering price tag of nearly $900 million. While preparations for this project are expected to commence early in 2025, it is crucial to note that past infrastructure developments, such as the expansion of larger locks, were fraught with cost disputes and delays.
Notably, this new reservoir project entails the acquisition of land, a situation governed by a 2006 legal prohibition. A legislative amendment to permit land acquisition is anticipated, but other opportunities to establish fresh water sources have not been discounted.
Without the introduction of a new water supply, the Panama Canal confronts the risk of losing substantial business. Although alternative sea routes are lengthier and pricier, they present a more predictable, delay-free environment for maritime traffic. Vessels could potentially circumvent Panama and opt for routes through the Suez Canal to reach the East Coast and Gulf Coast of the United States or, alternatively, opt for routes from Asia to the West Coast ports, then traversing overland via rail or truck.
Nonetheless, it is the uncertainty that weighs heavily in the decision-making process, with potential disruptions in the canal spurring interest in establishing land routes through nations like Mexico and Colombia, both of which boast coastlines along the Pacific and Atlantic Oceans.
The race to secure additional water resources appears to be a preemptive response to a shifting climate landscape. Panama’s comprehensive rainfall records dating back a century and a half bolster scientific assessments regarding permanent climatic alterations. The El Niño events, two of the driest within the last quarter-century, hint at the possibility of a recurring trend exacerbated by climate change.
While it is yet unconfirmed whether this predicament is attributed to climate change, the consistency of these climatic deviations with the preponderance of climate change models is undeniable.
In light of these evolving dynamics, the Panama Canal faces a complex and multi-dimensional challenge, with significant implications for global commerce and the broader maritime industry.
