WATER POLITICS

For months, a withering drought has created major traffic jams at the Panama Canal. The drought, which may have been exacerbated by climate change, has left the canal’s water levels lower than ever, forcing Panama to let fewer ships through. The restrictions have led to delays, increased shipping costs, and uncertainty over the future of one of the world’s critical trade chokepoints.

“This has fundamentally changed how shipping through the canal works,” said Soren Stokkebaek Andersen, a regional commercial manager at Leth Agencies, a shipping agency.

It has also disrupted the international shipping industry. Roughly 5 percent of the world’s seaborne trade passes through the canal, which is the gateway for 40 percent of U.S. container traffic. As Panama heads into the dry season, when restrictions will be tightened further, shipping companies that have long relied on the canal are bracing for even worse delays and are trying to reroute. This has created a fraught logistical puzzle amid a simultaneous maritime crisis in the world’s other main shipping shortcut: the Suez Canal, which is roiled by war in the Middle East.

As climate extremes become more common, shipping companies, analysts, and governments fear the Panama Canal crisis may not be an aberration but the new reality. Scrambling to deliver their goods on time has led shipping companies to question whether the canal will remain a reliable artery of global trade—and sparked renewed interest in finding alternatives to the canal.

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THE DROUGHT IS “a serious threat to the Panama Canal,” said Joseph L. Schofer, a professor emeritus of engineering at Northwestern University. The canal, which was built more than 100 years ago, was not constructed to withstand a severe reduction in rainfall.

Rainfall is essential to the canal’s operations. Each transit requires around 52 million gallons of freshwater to lift and lower ships into and out of the canal. This water comes from artificial lakes that rely on rainfall.

Panama’s rainy season usually runs from late April to November, but last year, October saw 41 percent less precipitation than average, and low precipitation is expected to continue until this year’s rainy season. In December, the water in Lake Gatun, the canal’s main reservoir, declined to unprecedented levels for this time of year, and water levels are expected to shrink further in the coming months.

The drought is driven by a strong El Niño, a climate pattern recurring every two to seven years marked by warm ocean temperatures. El Niño disrupts atmospheric circulation, weakening or displacing winds that would otherwise have brought greater rainfall to Panama and other tropical countries.

Although Panama is used to El Niño, this drought is much more severe than usual. And extreme weather events will likely become more frequent as climate change worsens. “We have not yet experienced the full blast of El Niño,” said Nadim Farajalla, director of the climate change and the environment program at the American University of Beirut’s Issam Fares Institute.

The consequences will be dire for Panama. For one, Panama’s economy relies heavily on the canal. In 2022, it generated $4.32 billion in revenue, equivalent to about 6.6 percent of the country’s GDP. The El Niño-induced drought could cost the canal an estimated $200 million in revenue in its current fiscal year. But the drought also threatens Panama’s water supply. Lake Gatun, which feeds the canal, also supplies half of Panama’s drinking water, and a single ship’s transit requires as much water as half a million Panamanians consume in a day.

Panamanian officials have responded to the drought with tight controls on canal transit. In recent months, the Panama Canal Authority has restricted passage through the canal, from about 36 to 24 ships per day—a limit that will be further reduced to 18 ships in February.

In an email to Foreign Policy, the Panama Canal Authority said it is implementing additional water-saving measures. It has started to reuse water for different lock chambers and allowed the transit of two ships at a time if vessels are small enough. The canal authority has also tightened draft limits, which regulate how deep vessels can sit in the water; experts have projected that this could force some ships to reduce their loads by up to 40 percent.

“These are drastic measures,” Schofer said. And they have generated frustration among shipping companies.

Former Panamanian President Martín Torrijos, who led a project to double the canal’s capacity in 2006, said the unanticipated restrictions—and the subsequent backlogs—have led canal users to worry about its future capacity and reliability.

Before the drought, ships could book passage through the canal three weeks in advance or wait in line without a booking, Andersen said. But now, wait times have quintupled in some cases, and slots are sometimes booked months in advance. The canal authority has started to auction off extra slots to skip the line. Recently, one fetched a record $4 million at auction.

Shipping companies face three options—all of which are costly: pay to jump the line, wait, or reroute.

For the ships that choose to reroute, the three main alternatives are Egypt’s Suez Canal, Chile’s Strait of Magellan, and South Africa’s Cape of Good Hope. The latter two are reliable but require much longer journeys. The shortest option is the Suez Canal, the man-made waterway connecting the Mediterranean Sea to the Indian Ocean. The Suez can also let more ships in: Up to 100 shipscan use it in a day, more than four times the Panama Canal’s current capacity.

But with war in the Middle East, there are serious concerns about the Suez as well. In the Red Sea, Yemen’s Iran-backed Houthi rebel group has fired drones and missiles in at least 27 attacks on ships since the Israel-Hamas war broke out on Oct. 7. U.S. and U.K. forces, with support from Australia, Bahrain, Canada, and the Netherlands, struck at least 60 targets in 16 locations across Yemen on Thursday, in what U.S. President Joe Biden called a “direct response to unprecedented Houthi attacks against international maritime vessels in the Red Sea.” As the naval crisis has escalated, ships have been rerouting, and four of the world’s five largest container-shipping firms temporarily suspended trips through the Suez in mid-December.

The search for alternative options has fueled interest in trade routes in Latin American countries that hope to lure traffic from the Panama Canal.

Some of these are yet to be built. In Nicaragua, President Daniel Ortega said he wants to revive a plan to construct an inter-oceanic canal, but many Nicaraguans dismiss the prospect in one of the region’s poorest and most corrupt countries. Colombia’s plans are perhaps slightly more realistic. In an email to Foreign Policy, Colombia’s Ministry of Transport said that the government has already developed the first phase of plans for a 123-mile-long inter-oceanic train with 7 miles of tunnels to connect the country’s Pacific and Caribbean coasts. The ministry expects the project to be ready for tender by the end of 2024.

Other projects are already completed or underway. In 2022, Paraguay inaugurated the first half of a dual-carriage motorway, the Bioceanic Road Corridor, which will stretch from Chile through Argentina and Paraguay, ending in Brazil. And on Dec. 22, Mexico inaugurated part of a $2.8 billionrailway project to compete with the canal by transporting goods between the Pacific and Atlantic oceans.\

Yet experts are skeptical that these projects will pose a threat to the Panama Canal any time soon. Although Schofer finds the Mexican project promising, he believes it will only work for a small portion of the goods transported between the Atlantic and Pacific oceans, and that high costs make it less appealing than the Panama Canal. Andersen, meanwhile, said global shipping firms are unlikely to bet on untested routes in an industry where reliability is key.

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FOR NOW, the Panama Canal will continue to be the region’s main trade passage. But if canal authorities do not respond to mounting climate extremes, they risk losing business down the line.

One solution, proposed by the canal’s board, would be to dam up the Indio River and drill a tunnel through a nearby mountain to pipe more water into Lake Gatun. This is expected to cost around $900 million and could easily take six years to complete. Yet while there was broad popular support ahead of the canal’s 2006 expansion, this project is more contentious. A new dam would flood biodiverse lands and displace local communities, and politicians are wary of endorsing it ahead of Panama’s presidential elections in May.

The prospect of a new reservoir has already stirred heated debate. Political tensions have been high since last fall, when popular demonstrations paralyzed the country for more than a month. Panamanians protested a hasty government contract that allowed Minera Panamá, a subsidiary of Canadian company First Quantum Minerals, to operate a giant open-pit copper mine in a biodiverse jungle in the country for at least 20 years. “We’re a canal country, not a mining country,” people shouted in the streets.

The protests revealed the country’s identity crisis as it seeks to chart its future—particularly as the canal, the mining industry, and the Panamanian people all compete for water resources, said Raisa Banfield, Panama City’s former vice mayor and the president of Sustainable Panama, an environmental organization.

Regardless of whether they build the new dam, canal authorities must plan ahead, Schofer said.

Torrijos, for one, is optimistic. He believes Panama can act to “make this the last climate accident that disrupts transit through the canal.” “I think [competition] creates a positive pressure, because it pushes [Panama] to develop the potential we have,” he said.

Schofer is also hopeful that competition might give the canal “a real incentive to do a good job.” In the long run, he is confident that the Panama Canal Authority will come up with solutions—just as it did on a smaller scale in 2016, when it successfully implemented water-saving basins that reduced the canal’s water needs.

“But this will take time,” he said. “And how they manage it in the interim will be really interesting.”