There is currently a traffic jam in the Panama Canal. In the last week of August, there were over 200 boats stuck on either side of the waterway as they waited for the Canal Authority to let them through. Officials are imposing entrance limits due to what they say is a historic drought.
Approximately 40% of American containers, or $270 billion in cargo, and 6% of global trade are delivered through the Panama Canal. Further, 80% of global trade is conducted by sea. To figure out what could happen if this problem goes unsolved, Patrick Bet-David did a deep dive into the Panama Canal and the last blockage of the Suez Canal in 2021.
The Panama Canal is the busiest canal in the world, handling over 14,000 ships per year. It was updated and expanded for $5 billion in 2016, and in return saw a boom in tens of millions of additional toll dollars as shipping companies chose Panama over the Suez.
The canal was hit with a significant drought in 2023. The country of Panama, “fifth-wettest” in the world, is experiencing rainfall deficits that are negatively affecting the canal, according to Reuters. The locks of the canal are filled by lakes, which are shallower due to lack of rainfall in the rivers that empty into it. Chief Analyst at freight rate benchmarking firm Xeneta Peter Sand told Reuters that experts are expecting an even drier season in 2024.
To prevent ships from getting stuck, the canal administration implemented a measure to limit the amount of ships that pass through it to 32, compared to a usual 36 to 38 per day. Wait times doubled in August compared to July. Some $200 million in profits has already been disrupted, and that number is expected to rise. The waterway’s authority said the limits would remain in place to the end of the year and into 2024.
Hundreds of ships are stranded in the Panama Canal, one of the most strategic routes of global maritime trade, due to a severe drought. pic.twitter.com/K1ecQYKl5J
— Project TABS (@ProjectTabs) August 25, 2023
Many companies sought costly alternative shipping routes. The journey from Los Angeles to New York City was reduced by 60% when the Panama Canal was created, from 12,350 nautical miles when one travels by Cape Horn to 4,970 through the canal.
With the canal, it takes an average shipping vessel 10-14 days to go from New York to California; without the canal, it takes 30-35 days. With the canal, it costs ships $262,000 in fuel costs to go that distance; without, $705,000. The ocean trip maintains calm conditions when traveling by the canal; without it, boats frequently hit violent seas when rounding the cape, with Britannica calling it “one of the most feared sea routes” in the world. Obviously, similar reductions in price and time are gained when shipping from China to New York.
The suggestion for creating a canal through the isthmus of Panama dates back to the 16th century, after King Charles I of Spain learned of the area from explorer Vasca Nunez de Balboa. But it was only first attempted by the French in the 1880s, led by Suez Canal builder Count Ferdinand de Lesseps. The project was abandoned when the team realized the sheer difficulty of the undertaking: at least 25,000 people died in the three decades of construction, either from Malaria, injury, or thirst.
The United States purchased the rights to the land from the French for $40 million in 1902, following President Theodore Roosevelt’s rather forceful advocacy. The Panama Canal was officially completed and opened on August 15, 1914—the most expensive project of American history at that time, costing over $350 million.
It was a major engineering feat and revolutionized global trade. It was a major strategic asset for the U.S. during the Second World War, allowing them to deploy troops between the Atlantic and Pacific Oceans. Control over the canal was transferred from the U.S. to Panama in 1999, following the Torrijos-Carter Treatises signed in 1977.
How does the Panama Canal work?
The Panama Canal allows ships to transit between the Atlantic and Pacific Oceans without having to navigate the violent waters around the southern tip of South America.
It uses a lock system to do this. Ships enter locks, or large chambers that can be filled or emptied of water. Once entered, water is either pumped in to raise the ship or let out to lower the ship, enabling it to transit from sea level up to the level of Gatun Lake (an artificial lake created for the canal) and then back down to sea level on the other side.
The Panama Canal relies heavily on freshwater from Gatun Lake for its lock operations. Each lockage (the process of raising or lowering a ship in a lock) uses millions of gallons of water.
In periods of drought, water levels in the lake can drop significantly. If the water level becomes too low, there might not be enough water to operate the locks, which could force restrictions or even temporary closures.
What would be affected by its closure?
Diversion of Routes: Ships would need to revert to older, longer routes around South America or seek alternative passages like the Suez Canal for certain journeys, which would significantly increase transit times and costs.
Increased Costs: Longer journeys would mean higher fuel costs, increased crew wages, and other associated expenses.
Supply Chain Disruptions: Given the just-in-time nature of many modern supply chains, any delay can have cascading effects, causing shortages, increased costs, or operational challenges.
Economic Impact: Countries and ports that rely heavily on trade through the canal (e.g., certain U.S. ports, countries in the Caribbean) would suffer economically.
Potential Price Increases: The increased costs of shipping goods could lead to higher prices for consumers around the world, especially for products heavily reliant on these shipping routes.
Certain products are more reliant on ocean trade than others. According to Title Max, the top ten U.S. shipping imports by value are printers, TVs, car parts, sweaters, furniture, video games, pills, computers, toys, and shoes. Top ten imports by weight are furniture, bananas, artwork, car parts, coal, beer, oil, tires, seats, and tiles. Bananas, for one, cannot sit very long without going bad, and so long delays in the canal could lead to untold losses for fruit companies.
The top ten U.S. exports by value are cars, plastic, construction machinery, car parts, cotton, scrap metal, nuts, pork, wood pulp, and lab equipment. Top ten U.S. exports by weight are scrap paper, scrap metal, wood pulp, plastic, hay, fresh paper, cotton, sugar, soybeans, and chicken.
Lessons from the Suez Blockage
On March 23, 2021, a ship operated by Taiwanese company Evergreen Marine ran aground in the Suez Canal, blocking one of the world’s busiest shipping lanes. The ship was en route from China to Rotterdam, Netherlands, when it was caught in strong windstorm. About 370 boats were stuck waiting in the canal a few days after the Evergreen ship became lodged in a narrow part of the waterway.
It took six days for a team of 14 tugboats to free the ship. The blockage caused an estimated $9.6 billion in losses to global trade, and caused a loss of $400 million per hour. The blockage delayed the delivery of essential items such as food, medicine, and fuel. It also caused a spike in the price of oil and other commodities.
The incident revealed the vulnerability of the global economy to such minor disruptions as a single boat stuck in a waterway, and taught the world a number of lessons about shipping and logistics including:
- The global economy is highly dependent on shipping
- Shipping disruptions can have a significant impact on the global economy
- There is a need for increased investment in alternative shipping routes
- There is a need for better risk management in shipping
- There is a need for better communication and cooperation between shipping companies and governments
- Congestion: The canal is becoming increasingly congested, as the volume of shipping traffic continues to grow.
- Depth: The canal is not deep enough to accommodate the largest container ships, which are known as post-Panamax ships.
- Climate change: The Panama Canal is vulnerable to the effects of climate change, such as flooding and landslides.
The Panama Canal Authority is working on a number of solutions to address these challenges, including:
- Expanding the canal: The 2016 expansion project added larger locks to the canal, which allowed it to accommodate post-Panamax ships. Major ports are making further investments in expansion and infrastructure upgrades for the Panama Canal, according to the Journal of Shipping & Trade July 2021 report.
- Using new technologies: The canal authority is exploring the use of a variety of new technologies to improve efficiency, such as automated locks and digital navigation systems.
- Mitigating the effects of climate change: The canal authority is working to mitigate the effects of climate change by investing in water conservation and flood control measures.
- Developing alternative routes: In 2014, Nicaragua announced plans to develop a 173-mile canal that would cost somewhere between $20 and $50 billion. The project was eventually abandoned, but there was talk in 2022 of reviving it. Developing alternative routes to the Panama Canal is a long-term solution that would take many years to complete. However, these projects could provide a backup in case of a disruption to the Panama Canal.
Additionally, investing in the Panama Canal has become a point of geopolitical competition between the United States and China. As the latter continues to vie with the former for greater influence, the Panama Canal will increasingly become focal point of international strategy.