The Panama Canal is facing a crisis that is impacting global trade and the economy. The canal, which facilitates trade between the Pacific and Atlantic Ocean, is currently struggling due to a water shortage caused by droughts and El Nino events.
Can the world’s most important canal be saved before it runs dry?
The low water levels are making navigation difficult and forcing restrictions on the number of ships that can pass through. As a result, many ships are choosing to bypass the canal and take longer routes, increasing costs and causing delays. This situation is further exacerbated by disruptions in the Suez Canal and conflicts in the Middle East.
To solve this crisis, waiting it out or investing in new infrastructure projects are suggested as possible solutions. Additionally, alternative routes, such as the Bi-Oceanic Corridor in South America, are gaining interest as alternatives to the Panama Canal.
Why the Panama Canal is Dying?
A critical trade choke point in the Western Hemisphere, is facing a crisis that is affecting global trade and the economy. The canal, which provides a shortcut for ships traveling between the Pacific and Atlantic Oceans, is essential for the efficiency of trade routes between the US, Europe, and Asia.
However, the canal is currently experiencing an unusual crisis due to natural and geographic factors that are making it difficult to navigate. The speaker notes that around 5% of the world’s trade and 40% of America’s container traffic passes through the canal annually.
The economic significance of the canal to Panama is also highlighted, as the country earns a significant portion of its GDP from tolls charged on the ships that use it. The speaker goes on to explain that despite being a vital interest to many economic and military powers, the future of the Panama Canal is uncertain as it undergoes repairs. The crisis in the Panama Canal is different from the ongoing military crisis in the Middle East that is causing disruptions in the Red Sea.
1. The Effects of Droughts and El Nino
Panama Canal’s unique operation requires large amounts of fresh water, primarily from Lake Aton. The water is used to raise and lower ships as they pass through the canal’s locks. During a drought, such as the one caused by the El Nino event in 2023, the lakes that provide the water for the canal are not being replenished quickly enough.
This has resulted in dangerously low water levels, making it difficult for the canal to continue operating. The canal consumes about 52 million gallons of fresh water per transit, and without rainfall or alternate sources of water, the situation could become irreversible. The speakers warn that the canal’s economic and strategic benefits could be severely impacted if the water crisis continues.
El Nino, a climate phenomenon that causes droughts in some areas, has been lasting longer than usual, worsening the water supply situation in Panama. The country’s primary water source, Lake Gatun, supplies both the canal and the population, and the canal consumes a massive amount of water from the lake for each ship’s transit – half a million Panamanians’ daily water usage.
With only half of the usual number of ships being allowed to pass through due to water scarcity, trade flows between the US and several regions are being disrupted, causing massive delays for ships. It is estimated that wait times for ships without reservations have skyrocketed from around 2 days to over 11 days, making the longer route around South America a more viable option for some.
The canal authority is enforcing increasingly harsh restrictions, including reducing the number of ships and their cargo volumes. These measures have resulted in an all-time high $4 million bribe paid by a Japanese merchant vessel to skip the line, which is now a common practice for some ships.
2. Cost of Transiting Panama Canal is increasing
Cost of bypassing the Panama Canal has decreased significantly due to shipping companies opting for alternative routes due to a maritime crisis in the Suez Canal. Most ships that are arriving at the Panama Canal are choosing to skip it and take the longer and more expensive routes around South America or Africa.
The situation is made worse by the fact that ships are also avoiding the Suez Canal due to a war in Yemen, leading to increased costs and inflationary pressures for consumers. The speaker explains that this unprecedented situation for the global economy can only be solved through waiting it out or by investing in new infrastructure projects to reduce reliance on the Panama Canal.
Additionally, there is growing interest in alternative infrastructure projects to the Panama Canal, with four major proposed alternatives, including the Bi Oceanic Corridor, which aims to build a series of highways and bridges across South America to enable trucks to carry goods from coast to coast.
However, the challenges of South America’s unique geography, including the Andes Mountains and the Amazon rainforest, have historically prevented the construction of such projects, making their feasibility uncertain.
3. The Construction of Bi-Oceanic Corridor
Underdeveloped region in South America known as the Grand Chaco, which extends across Bolivia, Argentina, and Brazil. The area, which takes up two-thirds of Paraguay’s territory and is home to only 3% of its population, has historically been underdeveloped due to a lack of freshwater resources and rainfall.
However, Paraguay has recently embarked on an unprecedented highway-building spree, paving over 3,000 kilometers of additional roads and bridges since 2019. Once the Bi-Oceanic Corridor is completed in 2025, it will allow trucks from Southwestern Brazil and Argentina to bypass the Panama Canal and travel directly to Pacific ports in Chile for quicker exports to Asia.
This new trade route could significantly impact the Panama Canal’s business as countries in the Southern Cone save time and money. The speaker also mentions a proposed alternative to the Panama Canal further north in Colombia, where the government plans to build an Inter-Oceanic train network connecting the country’s Railways between the Pacific and the Caribbean by building nearly 200 km worth of additional track and tunnels.
Once finished, it could transform Colombia into a new epicenter of globalized trade in the Western Hemisphere.
4. Nicaragua Canal as a potential rival to the Panama Canal.
The proposed Nicaragua Canal as a potential rival to the Panama Canal. The idea of building a canal in Nicaragua dates back hundreds of years, with the country’s geography lending itself to such a project due to the existence of Lake Nicaragua.
However, the project has a chequered history, having been abandoned several times due to various reasons, including the successful completion of the Panama Canal and lack of funding. The most recent attempt to build the canal began in 2013 when the Nicaraguan government awarded the construction bid to a Chinese company called Hong Kong Nicaragua Canal Development Company (HKND).
The project was projected to double Nicaragua’s GDP and make the Chinese government the sole operator for 50 years. However, the project faced numerous challenges, including environmental concerns, protests from farmers over land expropriation, and financial instability due to the Chinese stock market crash and Wang Jing’s loss of fortune.
Despite Daniel Ortega’s vows to finish the project, it has still not begun over a decade after its announcement, and Nicaragua’s poor economy, corruption, and tensions with the United States make the prospect of building a rival canal to the Panama Canal increasingly unlikely.
5. Revitalization of an old railway system
The focus shifts to the revitalization of an old railway system, the Interoceanic Corridor of the Isthmus of Tehuantepec in Mexico, which aims to become a faster and cheaper alternative to the Panama Canal.
The Mexican Government is investing $2.85 billion into this project, which includes modernizing and expanding ports, building a high-capacity rail line, and constructing industrial parks. The rail project is projected to be capable of moving 1.4 million cargo containers between the oceans by 2033, representing about 33 million tons worth of total freight.
This rail project holds significant promise and competition for the Panama Canal Authority, as it could potentially move half of the Panama Canal’s volume within a decade. The success of this project is critical for developing Mexico’s South, which has long been among the poorest and least developed areas of the country.
Overall, the future of the Panama Canal remains uncertain, and its importance to global trade is being challenged.