Drought in the Canal: Shipping Effects

The Panama Canal is in a record drought, with water levels the lowest they've been since 2016.

Canal Facts

• The Panama Canal has been in operation since 1914, and was man made.
• Connects the Atlantic and Pacific Oceans and is only 80 kilometers in length.
• In 2022, 13,000 vessels made the trip through the canal, making it a critical channel for 40% of global cargo shipments.
• The USA represents a significant portion of the traffic in the Canal, with 23.9% of the cargo destined for Latin America from the USA taking this route.

Where's all the water going?

1. There has been record lows in rainfall. Forecasts don't look great, stating that they will remain at record lows until least October of 2023.
2. Vessel Displacement. EVERY ship that passes through the Canal sloshes 50 million gallons of water out of Gatun Lake.
3. Gatun Lake is draining. This fresh water lake is the only source of fresh water for Panama Country.

What can be done?

1. Reduce Cargo Levels.
2. Reduce draft levels. Draft level is the max depth of any part of the ship, like the rudder or propeller.
3. Maintain measures on water loss.
4. Take an alternative route. The Suez Canal and the Cape of Good Hope are options, but taking those routes will hurt efficiency and increase transit time.

What has been done already?

1. Panamaian Canal Authority has imposed draft restrictions starting in May of 2023, decreasing the draft level to 44 feet.
2. The number of ships going through the Panamax locks has been decrease from 23 down to 14 (10 large and 4 regular vessels), with the premium going toward the larger ships.

What's the impact?

1. The backlog of ships waiting to cross has increased, reaching levels of over 160 ships in August of 2023.
2. Average waiting time to cross the canal is up, with some waiting up to 20 days.
3. With the draft restrictions in place, the number of trips to move the same amount of cargo has increased.
4. Increased freight rates due to tightened shipping availability.
5. Holiday shipping will further increase the stressed system.

Affect on Crude Oil and Material Transit

The effects of the drought will most likely be negligible on crude tanker demand, global demand, and prices. An average of 2,130 million tonnes of crude oil were transported total between 2020 and 2022, with only 6.4 million tonnes taking the Panama Canal. Meanwhile, metal prices may rise as the cost of the voyages increase. Metal concentrates like copper and lithium from Chile and Peru to the EU could be more costly, which may or may not impact trade patterns for those countries. When countries switch up their normal routes, it causes ripples for other routes that don't normally see that volume, increasing cost and travel times.

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