Panama Canal is drying up: What does it mean for global trade?

A prolonged drought has resulted in authorities cutting the number of cargo vessels traversing the Panama Canal, one of the world's most important commercial routes, by around 36 per cent.

Each month, 1,000 ships pass through a US-built waterway excavated between 1882 and 1914, transporting more than 40 million tons of products.

Amid the most severe drought to strike the Central American nation, a tailback of vessels has built up, leading to doubt about the functionality of the shipping lane to provide reliable routes for global trade.

According to Panama's Canal Administrator Ricaurte Vasquez, the plummeting water level could hit authorities in the pocket by $500-700 million this year compared to previous projections of $200 million.

The vast amount of goods equates to around 5 percent of global maritime trade.

In 2022, over 14,000 cargo ships carrying a range of goods – including fuel, grain, minerals, and other products – from Asia to North America traversed the Panama Canal.

Recently, Vasquez has said authorities would cut ship crossings from 38 to 24 vessels per day, describing the move as a "significant reduction."

Experts see the disruptions to shipping trade deeply hitting Panama's revenues every month.

Since October 2023, the artificial 82 km waterway uniting the Atlantic Ocean with the Pacific Ocean has seen revenues fall around $100 million per month due to drought.

Authorities at the Canal point to the drought of the El Nino weather phenomenon and climate crisis amid urgent calls for Panama to push for new water sources for the canal's operations and human consumption.

Ports across the region have been impacted – including Nicaragua, Ecuador, Peru, El Salvador and Jamaica – with 10-25 percent of their total maritime trade flows affected.

However, experts say that the effects of drought are also being felt far beyond Latin America.

The Panama Canal crisis coincides with logistical issues between North America and Asia due to Houthis targeting commercial ships on the Red Saa.

Vessels are also being rerouted between the seawater of the Indian Ocean and between Africa and Asia as tensions have escalated in the Red Sea. It comes amid Houthi attacks on commercial ships with alleged ties to Tel Aviv as Israel continues its onslaught against Palestinians in Gaza.

Trade is expected to continue to be impacted over the coming months amid plans to slash the number of vessels crossing the Panama Canal from 36 to 18 ships by February.

Other global observers forecast that the issues related to global trade will lead to an international impact on the cost of living.

"This does not bode well for those expecting lower interest rates in 2024. With the Panama Canal also facing restrictions due to drought, supply chains will be disrupted, causing price pressures. Central Banks will not be amused," wrote Richard Goatcher, a housing market analyst.

Sinking water levels in Central American nations have reached "critical" levels amid what experts say is the worst drought in the Panama Canal's 143-year history.

If a similar pattern continues, "reduced income from tolls could total some $700 million by around April," according to projections by Reuters.

Experts point to shrinking levels of rainfall at Gatun Lake, which makes up a major part of the Panama Canal providing water for more than 50 percent of the country of over four million people, have dropped by 15 million tons.

It has led to cargo ships facing extra time in transit while authorities investigate logistical alternatives to bolster water supply to the canal.

The drought has struck the trade route hard, forcing shipping restrictions to key gateways.

Despite the impediments striking global trade routes hard, the canal is believed to meet its income projections for the fiscal year due to a toll increase.

Last August, port authorities announced similar measures, which paved the way for heavy congestion of large stretches of water where most of the waterway users hail from North America and Asia.

The waiting time shot up from 3-5 days to around 11 days as ships waited to cross the canal.

Under usual operations, the Panama Canal operates throughout the year without stopping - 24 hours a day, 365 days a year – keeping operations afloat with around 9,500 staff at the site.