The Panama Canal suffers a water crisis and puts world trade in trouble

It was expected to be a temporary headache, but it is turning into a chronic migraine.

The Panama Canal, through which products valued at 270 billion dollars transit each year, is immersed in a historic water crisis for which it has had to limit the number of ships that cross each day.

According to different Panamanian media, the Canal Authority has advanced that income losses in 2024 due to the crisis will be between 500 and 700 million dollars (between 462 and 648 million euros).

Meanwhile, projections for water levels continue to decline.

The problem is measured in feet.

Gatun Lake, a man-made body of water in Panama City that feeds the Canal, has gone from having a water level of 88.8 feet in late 2022 to just 81.5 currently.

This is insufficient for 38 ships to cross a day, the capacity that was normally seen.

The Canal Authority is allowing the passage of only 20 vessels and could lower the maximum to 18 in the coming weeks.

And the projections of the Gatún water level suggest that in March the water level will drop even more.

The restrictions have caused bottlenecks, delays, increased shipping costs and uncertainty about the future of the Canal, which this year marks 110 years since its opening.

“We are at the mercy of Mother Nature,” says Lori Ann LaRocco, author of the book

Trade War Containers Don't Lie

: Navigating the Bluster.

“Every day that it doesn't rain enough just shows how serious the situation is going forward.

The only way this will change is if it rains enough.

And that, for now, is not happening,” adds LaRocco, also a journalist specializing in supply chains on the American television network CNBC.

In a study in the journal

Nature

published on January 11, a group of scientists warn that the planet will experience more extreme drought conditions like the one Panama is experiencing as a consequence of the El Niño phenomenon — a climate event related to global warming. of the Pacific Ocean—or periods of extreme rain.

In a conservative scenario, these patterns are expected to impact approximately 3 billion people on the planet.

But in a more fatalistic scenario, there could be up to 5 billion people (66% of the world's population) by the end of the century.

The inflationary impact of the situation in Panama has already been felt by the consumer since the middle of last year.

40% of the container traffic of goods destined for the United States crosses through the Canal, which is used as an alternative to the network of roads and railway lines that connect the two coasts of the country, so the final price of the goods has increased.

Transporting each container costs shipping companies about $8,000, according to LaRocco, and each delay is an additional pressure on the price of goods.

Companies are already looking for alternatives.

“We have not yet seen a tsunami of containers leaving the port of New York bound for Los Angeles, we are not there yet.

But the longer it takes to solve [the Canal's water crisis], the more this effect will begin to be seen,” warns the expert.

Despite the investment that was made a few years ago, which cost close to 5 billion dollars, to expand the Canal and allow the entry of larger ships, it has been the climate component that has surprised the authorities.

“As real and viable alternatives are the optimization of the train and highway system within the United States, as well as the construction in Mexico of the Interoceanic Corridor in the Isthmus of Tehuantepec,” says Roberto Durán, professor and researcher at the School of Government and Transformation. Public of the Tecnológico de Monterrey (TEC) in Mexico.

Climate change

In addition, climate change is opening a new route: the melting of ice caused by global warming in northern Canada is creating a new natural waterway that could connect Asia with Europe, passing through North America.

“As global trade grows, it means we need more demand for capacity.

And if the Panama Canal, far from being able to expand that capacity, is limited, we have a problem there,” says Durán.

As if world trade did not already have numerous weak points, one more has just been added.

The military response by the United States and the United Kingdom against targets in Yemen linked to Houthi militias has expanded the conflict in the Middle East.

The Houthis, in retaliation, attacked commercial ships transiting through the Red Sea on January 18, which is connected to the Mediterranean through the Suez Canal.

This is another conduit through which heavy merchandise traffic passes as part of global trade.

“Many ocean carriers had begun to opt for the Suez Canal to reach the United States on the east coast and avoid any type of delay or fee related to the Panama crossing,” explains LaRocco, “now that we have the attack on the Red Sea , that is causing delays and additional costs there as well.”

This is generating “the famous triple crisis,” says Durán.

“We had the health problem that caused a pandemic and why the borders were closed, the geopolitical problem in which suddenly people who you thought were no longer fighting started fighting and, as a consequence, are closing routes;

and then there is the climate problem,” explains the academic.

For now, the only thing left for the Panamanian Government is to look at the sky.

Their goose that lays the golden eggs is at stake.

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