Panama Canal with historically low water levels. The lake that feeds it is drying up

Kanał Panamski

The water level in Lake Gatun, which feeds the Panama Canal, is beginning to drop. In response to this situation, the Canal Authority (ACP) has decided to significantly limit the number of vessels that can use it. Allianz Trade’s analysis indicates that the drought, and the resulting drop in lake water levels and reduced canal capacity, could lead to a prolonged trade recession around the world.

Panama Canal plays key role in global trade

The Panama Canal, some 80 kilometers long, has served as a link between the Atlantic and Pacific Oceans since 1914 and is a key element of world trade. 3-5 percent of the goods exchanged flow through it. In the Republic of Panama, despite average high rainfall (an average of 247 mm over the past 10 years), the current year is the second driest since 1950, which is more than 70 years. Although the canal has already experienced droughts, it is very rare for restrictions to be in effect during the rainy season, which runs from May to December.

Weather phenomena have led to historically low water levels in Gatun Lake, which is essential for operating the locks and facilitating navigation through the Canal. It is also one of the largest artificial water reservoirs in the world and is an important ecosystem that supports the region’s biodiversity. Gatun is also an important source of drinking water for nearby cities and a place for recreation and tourism. The drying up of the lake is partly due to the El Niño phenomenon, which warms the Pacific Ocean and affects temperature and precipitation around the world.

The historically low water level in Lake Gatun reduces the number of ships that can pass through the canal

Due to low water levels caused by the extreme drought, the number of ships that can pass through the canal is being restricted. As of November, the number has been reduced from 31 to 24 ships per day, and as of February 2024. A further reduction is planned, to 18 units. That’s a drop of almost half compared to normal periods, when up to 36-40 ships passed through the canal each day. ACP also had to lower the draft limit from 50 feet to 44, which results in a reduction in the weight of the cargo carried.

Fewer crossings is a significant problem for Panama, as its budget relies heavily on the revenue the canal brings in each year. These amounts are in excess of $4.6 billion.

The effects of these restrictions may be felt in various sectors. Allianz Trade’s analysis suggests that such a drastic drop in canal capacity could trigger a trade recession in 2024. In addition, price increases are possible in the energy and consumer sectors, as the main commodities transported through the Panama Canal are crude oil and petroleum products (30 percent), container cargo (22 percent) and grain (13 percent). The canal primarily connects the east coast of the US with Asia and the west coast of South America, so reduced capacity could increase the price of products shipped between these regions.

Alternatives to the Panama Canal include other routes, such as the Suez Canal or the route around the Cape of Good Hope, which, however, involves longer transport times and higher fuel consumption. Companies are beginning to consider these alternatives to avoid Panama Canal fees, which may increase as capacity is reduced.

Climate change will affect global trade in goods

Given the 1.5°C increase in global average temperature, climate change could have a long-term impact on the Panama Canal. While projects to improve and restore Panama’s rainforest could reduce the climate-related costs of trade through the Panama Canal in the long term, reducing the draft and limiting the vessel limit seem like the best solution for now.

Analysts warn that the physical consequences of climate change are real and increasingly apparent, and the drought is one of the serious signals of what may await us in the near future as a consequence of global warming. Temperature rise by 2030. could significantly reduce the transport capacity of the Panama Canal, which in turn will affect global trade in goods and international logistics.

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