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Water levels in the Panama Canal are critically low, and the effects could be devastating. The canal represents one of the world’s most important trade routes and plays an essential role in the US trade system.
Ship traffic in the canal has already fallen by 25%, and throughput capacity has been cut in half. This drought will only worsen as an intense El Niño winter rolls through.
Although there aren’t any great short-term solutions, this should be the kick in the ass the US needs to reshore processing. Outside of mitigating future disruptions, everyone using the Panama Canal will just have to ride this wave (or use longer and more expensive routes).
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Hey everybody. Peter Zeihan here coming to you from above Denver. And today’s topic is the Panama Canal and the impact on trade now that it’s largely shut down or partially shut down.
It hasn’t rained really in Panama in several months. They are in the middle of the most intense El Nino on record. And unlike most canals that, you know, go up and over and therefore have on continental lands and so have lots and lots of water to draw from, Panama is going for ocean to ocean, sea level to sea level.
It has to go up a few hundred feet. And which means that aside from the first and the last lock, which touch the ocean, everything else is water that comes from the sky and it is an isthmus. And so there’s not a very large water catchment issue. And that catchment issue also has to supply all of the water for the city of Panama, which is about home to three quarters of the population of the country.
So you get a prolonged drought event like they’re in the middle of and things are bad. If anything, it’s worse than it sounds because we’re supposed to be in the middle of the wet season right now. The dry season starts in about 6 to 8 weeks. And so they know that this is going to get worse before it gets better.
And they’re probably going to have to wait till the next wet season, which isn’t going to start until the beginning of next summer. In the meantime, the number of ships transiting the canal has already dropped by over a quarter. And of the ones that are still going through, they’ve had to reduce their draft by about a quarter, which means that the amount of weight that they can carry is reduced by about 40%.
So the bigger ships aren’t going in at all. The smaller ships are carrying less, and it adds up to very, very roughly a 50% reduction in the throughput capacity of the canal. Now, for the United States, it’s kind of a big deal. This is the piece of international infrastructure that we use by far the most. Even more than that big bridge over the Great Lakes going to Canada, about 6% of global trade transits the canal.
Most of that trade is from the United States. Very heavy in the commodities space, energy and especially foodstuffs going from the Mississippi in the East Coast into Panama and then across the Pacific. The alternate route is a few thousand miles longer. It crosses the Atlantic into the Mediterranean, through Suez, around India, and then up to East Asia. A much more expensive route takes a couple of weeks of extra.
It’s not the best solution even once you consider the extra cost. Keep in mind that really it all it takes is one Filipino crew on a container ship throwing a party at the wrong time in the middle of a canal and a ship can get stuck. And then that shuts down, too. There’s not a lot that anyone can do here.
Building up the alternative infrastructure to ensure a backup water supply would require a few billion dollars in several years, and you would still have to wait for it terrain to fill up those reserve reservoirs. So really, all we can do here is wait. About the only thing that I could suggest, and this is something that I think it’s high time we do anyway, is for the United States to massively expand its production footprint in the processing of the raw commodities that it exports.
Not only would you then have a much denser, high value ratio to wait in bulk for the things that you export, but there’d be a lot more economic activity generated within the continental United States as well before you even get to the export component. Anyway, that’s my $0.02. That’s all I got for day. Everyone, take care.
