The Panama Canal Water Crisis

By Victor Bouret

The Panama Canal is currently facing a water crisis threatening its operations and business. This past decade has been Panama’s driest since the 1950s. The Canal’s engineering open water system design forces it to draw water from nearby lakes for its operations. Since the water levels are lower during the dry seasons, the Canal cannot provide passage for larger vessels. The lowered rainwater levels (largely due to climate change) produce negative externalities on the Panama Canal and its stakeholders and reduce its ability to meet supply chain demands. The crisis causes supply chain shortages, burdens shipping companies, and creates revenue losses for the Panamanian government. 

The impact of climate change on rainfall and water temperatures in Panama is essential to understanding the water crisis. Scientists describe climate change as a significant key contributor to droughts occurring in the last decade in Panama. The El Niño and La Niña phenomena exacerbate the water shortages. Meanwhile, climate change has also affected water temperatures. The water temperature in Lake Gatun has increased by 1.5 degrees in the past decade. This hotter water causes the lake levels to drop due to increased evaporation. 

This past year the Canal had 58 percent less water available than it needed for its regular operation. In 2019, the canal area had only about 90 percent of the average rainfall. The impact this has on the vessels is felt near the end of the dry season when water levels run extremely low after months of little rain. It takes around 52 million gallons of water to move a ship across the Canal, and currently, it is unable to draw enough water with its open system from the lakes to let large vessels through. As organizations predict climate change effects to worsen, it highlights the severity of the water crisis and how the Canal must adapt its business operations to brace for the impact of climate change.

The impact that this has on ships and the shipping industry is grave. Vessels must endure long waits due to a bottleneck forming at the entrances of the Canal. Furthermore, the Canal blocks big ships and/or imposes draft limits—a lowering of their weight loads—when there are low water reserves. The Suez Canal highlights the impact a blockage in a significant canal can have. For example, the Ever-Given crisis in the Suez Canal in mid-2021 froze nearly $10 billion in trade a day. This demonstrates the widespread global impact of ships not being able to cross canals freely. With future estimates predicting worsening extreme weather conditions, these bottlenecks will worsen if not fixed. 

With competition rising and fewer vessel slots available, the Panama Canal has also significantly raised its passage costs, currently around $450,000. The Panama Canal Authority also added a freshwater charge in 2020, a $10,000 fee. The fine helped reduce the climate change situation of the Canal and was estimated to cost the shipping industry $370 million a year. The impact of climate change is not only felt by governments and consumers, but the shipping industry is also facing significant consequences that impact its stability. 

Around 270 billion dollars pass through the Canal each year, and it also serves about 140 international trade routes. Stopping vessels from passing through delays deliveries for consumers. During Covid-19, this impact only worsened. Increases in consumers’ online shopping spurred higher demands for maritime shipping. During the pandemic, there was an extreme rise in e-commerce sales. Shoppers preferred deliveries to fulfill their needs while economic stimulus checks distributed spurred consumption. This caused a spike in ship traffic. The issue of the Panama Canal bottleneck worsened as it struggled with its water supply. 

To reduce the negative impacts of the drought on the canal operations, the Panama Canal Authority has plans to build a water management system by 2028. The changes are needed to resolve the tensions with shipping companies and make the canal traffic more stable. It also would increase the revenue possible for the Canal—currently $2 billion a year—and its sustainability. The latest project built reuses an outstanding 60 percent of the water, but this is not enough to stop the water crisis. The plans include a redesign to ensure an ample long-term water supply that is sustainable for the environment and can resist climate change increases while meeting the global trade demand. 

The Panama Canal water crisis has worsened over the past decade. The problem is an example of how it is essential to build resilient and sustainable infrastructure to safeguard the global economy. The situation and consequences will worsen for its stakeholders and the global supply chain in the coming years without significant changes to reverse climate change effects. Supply chain shortages and revenue losses are negative externalities that the world will have to face until the water crisis of the Panama Canal is solved.

Photo:

Vessels crossing a lock at the Panama Canal where water is sourced from Lake Gatun. 

(Taken from free to use Pexel, photograph by Michael D. Camphin)