Low water levels are reducing the canal’s capacity, but effects on Americans are small so far.
Low water levels are reducing the canal’s capacity, but effects on Americans are small so far.
L ow water levels in the Panama Canal have resulted in restrictions that have reduced the canal’s capacity, causing problems for some shippers. Despite the canal’s role as the sole direct Atlantic-Pacific connection for seaborne freight, the low water levels have so far had only a minor effect on U.S. trade.
What’s Wrong with the Canal Right Now
To sail from Asia to the East and Gulf Coasts of the United States, and vice versa, traversing the Panama Canal is the fastest route. Unlike shorter canals, which look like narrow artificial rivers, the 51-mile Panama Canal is better understood as a series of lakes connected by locks. The locks are necessary to accommodate the change in elevation needed to lift ships into Gatun Lake on one side of the canal and lower them back down to sea level on the other side.
Gatun Lake was created by damming the Chagres River in 1913. Ships use Gatun Lake for 21 miles of the 51-mile journey. Every time a ship goes through the canal, operation of the locks causes Gatun Lake to lose 50 million gallons of water. That water is replenished by the several rivers that feed the lake. Daily, the Panama Canal uses three times as much water as all of New York City.
Panama is one of the rainiest countries in the world. Ordinarily, the water level in Gatun Lake is at 89 feet at the end of the rainy season in November and falls to 85 feet at the end of the dry season in April, which is enough to keep the canal operating regularly. But 2023 is an El Niño year, which for Panama means the dry season is more severe than normal. The water level in Gatun Lake is currently only 79 feet, with the dry season still ahead. So the Panama Canal Authority (ACP, for Autoridad del Canal de Panamá) has begun enforcing draft restrictions and reducing the number of transits through the canal.
The draft is the distance between the waterline and the ship’s deepest point. It’s the depth at which a ship will run aground. The canal can usually handle ships with a draft of up to 50 feet. Since July, the ACP has enforced a draft restriction of 44 feet. The ACP expects the draft restrictions to remain in place for the rest of this year and likely much of 2024. To comply, shippers have to put less freight on some of the largest ships that traverse the canal. Putting less freight on the ship makes it lighter, which reduces its draft.
The ACP has also reduced the number of daily transits through the canal from 36 to 32. To prioritize the most valuable shipments, the reduction in daily transits is affecting only smaller vessels that use the canal. In 2016, the ACP completed a major project to build new locks to accommodate the largest ships parallel to the old locks. The same number of ships will go through the new locks as before the restrictions came into effect. The four fewer daily transits will be taken from the old locks.
What That Means for Trade
Both of these restrictions have the effect of reducing the canal’s capacity. Fortunately, the effects of the restrictions have so far been mild for trade.
Some news reports have described a “traffic jam” at the Panama Canal, which is true but not very interesting. There’s always a traffic jam at the canal. Every ship on the planet that wants to go directly from the Atlantic to the Pacific or from the Pacific to the Atlantic uses the canal.
Shippers always have to keep in mind the trade-offs involved with using the Panama Canal. Because demand is so high and there’s a hard physical limit on how many ships can go through, the canal is very expensive to use. That cost is often worthwhile because of the time it saves and the fuel it saves. In normal conditions, ships queue up at either end of the canal and wait for their assigned slot to make a passage.
The alternative is to go around, which either means going around the southern coast of South America or going around the world in the other direction. Going the other direction is done either by way of the Cape of Good Hope or through the Suez Canal. Of those options, the Suez Canal is the next-fastest route from Asia to the East and Gulf Coasts, but it takes about a week longer and shippers still have to pay steep tolls for using that congested passage. The canal-free routes avoid the toll problem but cost much more in fuel and can add multiple weeks to a journey.
So far, shippers have mostly been sticking with the Panama Canal. According to the ACP, as of today, most ships are waiting in the queue for one day or less. The alternative routes are always available as a pressure-release valve should the situation worsen. The ACP says 57.5 percent of containerized cargo from Asia to the East Coast of the U.S. this year went through the canal, which is roughly the same proportion as last year, and that about 70 percent of the largest container ships have drafts below 44 feet.
For shipping from Asia to the East and Gulf Coasts, there is the additional option of sending freight to the West Coast and moving it over land. Owing to labor conflicts and the world-class inefficiency at the U.S. West Coast ports, more shippers in the past year or so have been opting for East and Gulf Coast ports instead. Worsening conditions at the Panama Canal could change that calculus and send more freight back to the West Coast, which is currently underutilized relative to previous years.
Intermodal transportation within Panama is also an option. Before the Panama Canal was completed in 1914, the big idea in Atlantic-Pacific transportation was a Panama railroad. The U.S. was deeply involved in its construction, and it was completed at tremendous cost in 1855, parallel to where the canal is today. At that time, pre-airplane and pre-transcontinental railroad, one of the best ways to get from New York to California was to take a ship from New York to Panama, a train across Panama, and a ship from Panama to California. That railroad is still there and has been upgraded in recent years, and now it’s used primarily for freight. It’s run by CPKC, the new railroad formed by the merger between Canadian Pacific and Kansas City Southern earlier this year, and provides another option for smaller or time-insensitive shippers who want to avoid the canal.
For American consumers, the effects of the Panama Canal restrictions have been nearly nonexistent so far, as Greg Miller explained at FreightWaves. The container ships that serve the United States use the new locks that have not been affected by the reduction in daily transits. They’re large and carry valuable cargo, resulting in higher tolls, so the ACP has good reason to prioritize them.
U.S. demand for imports is also much lower than it was during the peak of pandemic-induced supply-chain constraints. Carriers have been canceling sailings on transpacific routes as service returns to more normal levels. In its most recent guidance to its customers, DHL reported virtually no congestion at any major U.S. seaport. It noted that backlogs due to work actions have been eliminated since the International Longshore and Warehouse Union finalized its new six-year contract with employers a week ago. With less demand and excess capacity stateside, Panama Canal disruptions mean less for Americans than they might have a few years ago.
The restrictions have had more of an effect so far on U.S. exports, not imports. U.S. energy exports leave through the Gulf Coast and commonly use the Panama Canal to get to Asia. Shipments of liquefied petroleum gas (LPG), such as propane and butane, of which the U.S. is the world’s largest exporter, have been affected by the canal restrictions. Large LPG ships that use the new locks have been deprioritized in favor of container ships as the restrictions take effect. That has sent the auction price for transit slots for LPG ships through the roof, with one trip recently going for $2.4 million, up from normal prices in the low hundreds of thousands before the restrictions.
The Future of the Canal
Shipping analyst Lars Jensen, writing for the Journal of Commerce, warned of what could come next for Panama, since 2024 could see water levels lower than they currently are. He wrote that continued lack of rainfall couldn’t shut down the canal entirely, it could only make the restrictions tighter. Those would continue to affect smaller vessels more than larger ones, and consequently, countries such as Chile or Brazil more than the U.S.
From the ACP’s perspective, if the canal can accommodate fewer vessels than before, it would be more worthwhile to let big vessels through, since they pay higher tolls and carry more freight while using basically the same amount of water as smaller vessels. That would mean container ships would continue to be little affected by the restrictions. In a very bad scenario where the restrictions are so strict that they eat into container ships’ slots, the non-Panama routes would become cheaper relative to the Panama route, and trade would still get through.
Lori Ann LaRocco, writing for FreightWaves, wrote that some shippers could soon reach the tipping point where the Suez route becomes more sensible. She pointed to data showing schedule reliability declining on routes between Asia and the East Coast. U.S. exporters are likely to make the switch before importers do because agriculture or energy shippers are more likely than container shippers to find the Suez route advantageous, given their lower prioritization in Panama.
In the longer term, the ACP is looking to divert more rivers into the canal. It signed a contract with the Army Corps of Engineers in 2021 for a project that is expected to cost $2 billion over the next ten years. In addition to operating the canal, the ACP supplies water for about half of Panama’s population. “We would have done the same over a 25-year period if the weather stayed normal, but now it has to be done in 10 years,” the ACP administrator, Ricaurte Vásquez Morales, told the Wall Street Journal in June.
The Panama Canal remains one of the world’s greatest feats of engineering, and after more than a century of its operation, shippers and canal authorities have learned how to use it and run it effectively. The challenges it currently faces will require adaptation, especially if climate change brings about lower or more erratic rainfall. But so far, the economic effects on the U.S. of the current restrictions have been small, and trade will always find a way.