Effects on World Trade As Panama Canal Dries Up

A decade ago we wrote about investment and the Panama Canal Expansion. Part of this had to do with how ports up and down the Atlantic coast of the Americas were going to prepare for larger, “cape size” vessels that would now pass through the new Panama Canal locks instead of delivering goods to West coast ports. We wrote about investment opportunities related to this potentially massive shift in global trade routes. Today we have a new Panama Canal issue. We are concerned about the effects on world trade as the Panama Canal Dries up!

Panama Canal Expansion

When the Panama Canal opened in 1914, its locks allowed passage of the largest United States warships of the day. The reason that the USA wanted a canal was to allow it to project naval power in both the Atlantic and Pacific Oceans without having to go around Cape Horn at the tip of South America. When Panama took over the Panama Canal in 1999 they focused on expanding its commercial use although the US and UK still have rights of passage for military vessels. The point of a new set of locks was to allow newer and much larger vessels to pass through Panama and not have to go around Cape Horn or use the Suez Canal. The cost of the new locks, dredging of lake Gatun, rock removal at the Culebra Cut, and various other expenses came to $5.25 billion. As of 2023 the Panama Canal generated more than $4 billion in yearly revenue.

Bigger Panama Canal Locks and Greater Water Requirements During a Drought

The way the Panama Canal works is that ships from the Pacific or Atlantic enter the locks at ocean level. Water from the canal, Lake Gatun, flows in to raise the water level to that of the canal. That water is released into the ocean when the next ship arrives. This occurs at several steps as ships rise 85 feet above sea level and then come down again. Panama has historically gotten lots of rain. So, over the years, water has to go somewhere and the locks have acted like two rivers going to the sea on both coasts of Panama. Two things have happened in the last few years. The new, larger locks for bigger ships use more water and Panama has seen its driest months since 1950!

Effects on World Trade As Panama Canal Dries Up

Saving the Panama Canal

As it rains less across the Panama Canal than in Panama City, Panama, the Panama Canal Authority has had to reduce the number of boats allowed to pass through the canal. An article in Bloomberg notes that the issue may come down to whether or not saving the Panama Canal over the long term is possible. On this issue will depend $270 billion in trade. About 5% of world shipping volumes pass through the Panama Canal every month. The hope when Panama expanded the canal was that they could raise the historic 6% of world shipping volume through the canal to rival the 12% carried through the Suez Canal. The current water shortage not only imperils that goal. It threatens the viability of the Panama Canal! An easy fix would be to pump salt water into the canal but Panama City, Panama and its more than 1 million inhabitants depend on Lake Gatun for their drinking water.

Panama Canal Alternatives

If the Panama Canal ends up allowing less and less traffic, ships passing around the tip of South America will add to transit costs and cost of goods for customers. The Suez Canal is not a viable solution for goods shipping out of Asia for North America and especially not now that Houthi rebels are attacking ships in the Red Sea. The greatest benefit from Panama’s problems will be US west coast ports like San Diego, Los Angeles, and San Francisco and railroads that will carry freight across North America.

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