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!

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.

The Panama Canal Expansion is the largest project at the Canal since its original construction. The project will create a new lane of traffic along the Canal through the construction of a new set of locks, doubling the waterway’s capacity. The existing locks allow the passage of vessels that can carry up to 5,000 TEUs. After the expansion the Post-Panamax vessels will be able to transit through the Canal, with up to 13,000 TEUs. The Expansion will double the Canal’s capacity, having a direct impact on economies of scale and international maritime trade.

According to the Panama Canal Authority completion percentages for the various sub projects are as follows as of January 2015.

• Overall Project, 84%
• Pacific Access Chanel, 83%
• Gatun Lake and Culebra Cut Dredging, 89%
• Design and construction of third set of locks, 81%
• Pacific Entrance Dredging, 100%
• Atlantic Entrance Dredging, 100%
• Raising Gatun Lake maximum operating level, 94%

The project broke ground in 2007 and had an expected total cost of $5.2 Billion. The original competition date was in 2014, the centennial year for the canal but has been moved back by labor disputes, cost overruns and contract renegotiations.

A Live View of Construction

The Panama Canal Authority web site provides access to live webcams at the various locks and overlooking the construction. Click the image for a choice of webcams. The image below is of lock construction.

These are live feeds and update every few minutes so you can watch ships pass through the locks and see daily progress on the locks.

Taking the Lowest Bid

The old joke about the space program was that astronauts sat on top of rockets with thousands of critical parts ALL MADE BY THE LOWEST BIDDER! That was also the case with the Panama Canal Expansion Project. A year ago Reuters published an article about how taking the lowball bid turned into a problem for the Panama Canal Authority.

A bitter dispute between the Panama Canal and a Spanish-led consortium of construction companies over the spiraling cost of expanding one of the world’s busiest waterways was years in the making.

The two sides are at odds over who should pay for $1.6 billion in cost overruns to build a third set of locks for the canal, the main part of the expansion of the 50-mile cargo route that connects the Atlantic and Pacific oceans.

The bid for the locks only was $3.1 Billion. One of the bidders for the project, Bechtel, was quoted as saying that one could not pour the concrete needed for the new and larger locks at the price that won the bids, much less complete all work on the locks. The contractor blamed the rain (in a country that commonly gets five to seven feet of rain a year in the Panama Canal area). The dispute has been settled to the extent that work resumed. Arbitration began in July over how to deal with $1.6 billion in cost overruns. As of December the contractor consortium had $2.3 Billion in claims before the arbitrators and as of December 31 arbitrators granted $233 million in claims. The project completion date has been moved back to 2016 but no month has been specified.

Effects on Global Shipping and American Energy Products to Asia

The ability of huge ships to pass through the Panama Canal will change global shipping patterns. Ports up and down the Eastern coast of the Americas have been dredging deeper entrances and adding larger cranes in order to deal with “Post Panamax” shipping. Circle of Blue notes that big effects will be felt far and wide from an expanded canal.

In every major study that assesses the new canal’s influence on trade, including a 2013 report by the U.S. Maritime Administration, researchers find that among the project’s big effects will be increasing the flow of American energy products to China and Japan.

Bit by bit the Panama Canal Expansion advances and perhaps in 2016 we will see the start of far reaching effects of this effort.

Panama Canal Expansion Update January 2015 DOC

Panama Canal Expansion Update January 2015 PDF

Panama Canal Expansion Update January 2015 PPT

More Resources

The Panama Canal Expansion will soon funnel much more trade through the old Panama Canal. The country never had a recession after 2008. When things were most bleak elsewhere Panama had a 3.5% growth rate. Buy property along the new metro line, rent to businesses, and bank you rent checks in dollars. Set up an offshore service center using skilled, English proficient workers at “offshore” rates. Or, notice the North American companies that do business here and invest in them. In fact, if you are investing for retirement you might just consider a “pensionado” visa and retire to this tropical paradise.

Investment in Panama is still a good idea. Many offshore opportunities have gone sour with the slowing of the Chinese economy and decreased demand for raw materials. Panama has strong banking and insurance sectors and receives a billion dollars a year directly from Panama Canal tolls. Before offering our suggestions regarding investment in Panama here are a couple of quick updates.

Panama Canal Expansion, Metro Lines and Canal Tolls

Disagreements about cost overruns have been ironed out and the project is back on track. Completion of all construction is expected in 2015 with full operation of the new set of much larger locks in 2016. The new locks will be operating just in time for United States oil and natural gas companies to ship through the canal to Asia. Panama City, Panama is thriving and there is a huge growth west of the Canal. Japan is negotiating with the Panama government to build a $2 Billion metro line including a bridge across the Canal to serve the growing population corridor extending west of the city. The word is that the price for loans and running the operation will be a better toll rate on Japanese shipping through the newly expanded canal.

Opportunities for Investment in Panama

Regarding investment in Panama we are looking in the $100,000 to $10,000,000 range. When we wrote about foreign real estate investments we suggested that you want an area where there is growth, opportunity for asset preservation and real property that you can touch instead of shares of a real estate trust. And in this case we are looking at real estate for rental, renovation and resale. In our 2012 article we suggested buying property along metro line 1. When the new line across the canal and to the west opens, this will increase property values, especially for commercial property near stops along the route. Another metro line is planned to follow the other growth corridor to the east and connect Tocumen International Airport with its eight million passengers a year to the city. As the city spreads east and west some of the best real estate deals are in older parts of the city. Panama City was fifty thousand people mostly living on a peninsula until the canal was built century ago. Now the metro area has a million and a half people and is still growing. Because there was originally always more land to build on builders did not renovate but rather built new. Now there are sixty, seventy and eighty year old buildings ripe for remodeling and an increase in rents. An example is an apartment building with two dozen units in the El Cangrejo neighborhood near a Windham Hotel and Casino, the Veneto, being offered for $4 million. This is probably negotiable. Rents are currently $750 a unit providing a cash flow of $18,000 a month. This investment in Panama is an example of a building in a neighborhood that is upgrading and becoming more lucrative to property owners. If an investment in Panama like this interests you feel free to contact us and we will put you in touch with our Panama office. When there are still signs of a market correction and global economic slowdown remember the little country that did not experience a recession this last time around!

Investment in Panama DOC

Investment in Panama PDF

Investment in Panama PPT

More Resources