Panama: When Waterways Lack Water

For 110 years, the Panama Canal has provided a convenient way for ships to move between the Pacific and Atlantic Oceans, helping to speed up international trade instead of sailing around the southern tip of South America. But the current problems at this engineering marvel, which handles an estimated 5% of seaborne trade, are the latest example of how crucial parts of global supply chains can suddenly seize up. Low water levels in the canal are causing a “traffic jam” on this historic trade route, threatening to slow down shipping in the long run and increase transit times. This development is raising alarm among canal officials and the shipping industry as – compared to 2022 – the number of transits decreased by two thirds.
 

Water shortage in the tropics?

Although Panama has an equatorial climate that makes it one of the wettest countries, rainfall in 2023 was 30 percent below average. This lack of rainfall has had a negative impact on Gatun Lake, which feeds the canal and its mighty locks, causing its water level to drop to 24.2 meters. Usually the lake’s water level typically reaches some 27 meters at the end of the rainy season in November, and then usually doesn’t drop below the 26 meters after the dry season ends in April.

The immediate cause appears to be the El Niño climate phenomenon, which initially causes hotter and drier weather in Panama, but scientists believe that climate change may be prolonging the drought and rising temperatures in the region leading to a drier-than-usual dry season.  
 

Water locks to flush-out ships

You may wonder why 24 meters of water in the feeder lakes are not enough. The canal relies on a century-old water lock mechanism, akin to elevators, to facilitate the passage of ships. Each ship traversing the canal uses millions of gallons of water sourced from nearby lakes. But because a longer dry season and a shorter rainy season have led to a freshwater shortage in 2023, the canal authorities now have less water to work with as they move each of these ships through, reducing the number of transfers on the 82-kilometer passage.
This has led to a severe “traffic jam” at both entrances to the canal, in the Atlantic and in the Pacific – not because of a stuck ship (like in the Suez Canal in 2021), but because of a “lack of water”…

Traffic jams at a bottleneck of maritime trade

Many experts had warned about potential disruptions to maritime trade even before what happened last year: Canal authority officials had to slash the number of ships allowed through, creating expensive headaches for Panama and shipping companies.

Before the drought, as many as 38 ships a day were passing through the canal. In the months that followed, this number was gradually reduced to fewer and fewer daily passages, as the situation remained tense. By January 2024, only 22 vessels were authorized to transit, with an increase to 24 in sight. But that is far from enough. In addition, the canal authority is limiting how far a ship’s hull can go underwater (known as its “draft”), which significantly reduces the weight it can carry. Less cargo on board leads to even more disruptions, as the number of ships passing through each day is low, but the number of ships arriving is as high as ever before. At the peak of these problems in late 2023, more than 150 ships were waiting for passage.

This presents shipping companies with a costly calculus: They can risk waiting for days, pay a hefty fee to skip the line, or avoid the congestion by taking a longer route.

A reservoir for more reserves?

The daily transit and vessel draft restrictions will remain in place throughout 2024. They were also implemented to conserve water, as the passage of one ship is estimated to consume as much water as half a million Panamanians use in one day. Each passing ship uses around 200 million liters of water from the lake, raising questions about how to balance the canal’s water needs with those of local residents.

But in addition to the lack of water, the low tide could also have a financial impact: Fewer passages could deprive Panama of tens of millions of dollars in revenue, as the canal generates more than 6% of Panama’s gross domestic product. No wonder, then, that the canal’s board recently proposed building a new reservoir in the Indio River. This is intended to bolster the water supply and increase traffic through the canal, making it less dependent on environmental factors.

Under the plan, the new water supply could allow for an additional 12 to 15 passages per day at a construction cost of nearly 900 million US dollars. Construction is not expected to begin until 2025 at the earliest, but the schedule could easily be delayed. For example, the construction of larger locks was completed two years late, in 2016, and that project was marred by cost disputes and political controversy. The new reservoir would also require the acquisition of land protected by a 2006 law, displacing at least some of its inhabitants.

Suez instead of Panama?

Without a new water source, the canal could lose significant amounts of business. Other ocean routes may be longer and more expensive, but they are less likely to experience unpredictable delays. One alternative is to move goods between Asia and the United States through the Suez Canal to the US East Coast and the Gulf Coast, a practice that was already gaining traction in the fall of 2023. But just as volumes on this trade lane were beginning to pick up noticeably, the Houthi attacks in the Red Sea put an abrupt end to the brief upswing.
Recently, some transport companies have decided to ship goods from Asia to US West Coast ports — and then move them overland by train or truck.

It will be interesting to see how things develop, as the disruptions caused by the current “dual canal crisis” show once again just how vulnerable global supply chains can be.