Recent headlines reported that Donald Trump wants to “take back” the Panama Canal. But while attention is drawn to ownership and control, the real problem is overseen. Overall, it is not about control, it is about the water in the canal.
The Panama Canal, a crucial route of global trade has been a linchpin for transporting goods between the Atlantic and the Pacific Ocean. However, extreme drought is disrupting this important transit route for a couple of years. The consequences are being felt across all industries. From canned food to energy, global supply chains face serious challenges.
But what is causing this extreme drought, and how does it impact global trade?
The Role of Panama in Global Trading
The man-made water road has a centuries-long history. From the Spanish vision of a passage between oceans to Ferdinand de Lesseps attempt to build it in the19th-century , the idea kept taking shape. Ultimately, the canal was completed in 1914 by the U.S. and became an essential trade route for multiple countries around the world.
The Panama Canal shortens the route for imported and exported goods by approximately 8,000 nautical miles. Compared to the traditional Cape Horn route, which is around 14,000 nautical miles, it saves additional time, fuel, and costs. Beyond its role in global trade, the canal is also a vital part of Panama’s economy. By generating revenue through tolls, the canal helps to fund Panama’s infrastructure and most importantly, economic development. In 2024 the canal generated an approximately total revenue of $5 billion, despite the severe drought that Panama experienced in 2023.
Understanding the Drought Crisis
According to the WHO, climate change is already affecting ecosystems, economies, and human health across the globe. But how does it particularly affect the Panama Canal and Panama’s citizens?
First of all, it is important to know that the canal is supplied by freshwater lakes like the Gatun Lake. This is particularly noteworthy, as one might assume that a canal connecting two saltwater bodies would not depend on freshwater sources.
The lack of rainfall, especially due to the El Niño weather phenomenon, has drastically reduced water levels in the lake. El Niño, a natural climate phenomenon characterized by warmer ocean waters spreading and staying near the surface, has worsened Panama’s drought situation. As a result, 2023 was reported to have the worst drought in the canal’s history, with an 8% reduction in rainfall.
Since the Gatun Lake also serves as a water source for a considerable number of people in Panama, the crisis has been further exacerbated. Many residents were at risk to run out of water supply at especially dry months.
In addition to the threatening water supply, the extreme drought has also impacted the canals daily operations. With less water available, the authorities are forced to limit the number of ships going through the canal every day.
In 2022, an average of 42 ships passed through the canal daily. Nevertheless, this was reduced to 32 to save additional water. By 2023, as the extreme drought persisted, the number of ships permitted dropped even further to just 22 per day.
Disruptions in Supply Chain
The Panama Canal handles approximately 5% of global shipping. Major contributors are individual Asian countries, which together transport around 50,000 long tons, as well as the U.S. East Coast and Europe together moving around 50,659 long tons from the Atlantic to the Pacific Ocean.
However, the decrease in traffic in the Panama Canal has increased shipping costs, with consumer prices calculated to rise 0.6% by 2025 due to disruptions in the transit route including the Suez Canal.
Stricter regulations further complicate global trade, requiring ships to carry less loads, while also extending waiting time. As a result, shipping distances have grown, leading to a 4.2% rise in ton miles. These challenges not only strain international supply chains but also contribute to higher greenhouse gas emissions.
Figure 1Main Routes of the Panama Canal. Source: Statistics – Panama Logistics Web Portal
Alternative Routes
Over the years, experts have suggested many alternatives. Instead of using the Panama Canal, ships could take alternative routes, such as around Cape Horn. Or also go through the Suez Canal or even do Arctic shipping.
However, each option comes with its obstacles. The Cape Horn route is a much longer route, which increases not only costs, but also transit time, and greenhouse gas emissions. Arctic shipping, on the other hand, remains highly risky, not just for people on board but also for the fragile Arctic environment.
The Suez Canal connecting Europe and Asia, plays a crucial role in global trade as well. Unlike the Panama Canal, it operates at sea level and does not rely on freshwater like the Panama Canal. However, rising security threats in the Red Sea and past disruptions, such as the Ever Given blockage in 2021, highlighted the importance of more resilient supply chains than ever before.
Solution and Strategies
Avoiding the Panama Canal altogether is one possible strategy for logistics companies, but it is likely not a sustainable long-term solution. It would be better if the drought problem were properly addressed. To that, multiple solutions were proposed.
One is weather modification like cloud seeding to create rainfall. While this technique works in dry climates, it is uncertain whether it will work in tropical climates like Panama’s.
A more enthusiastic idea is building a dam and a tunnel through a mountain to transport fresh water. However, this solution carries potential risks, including the displacement of farmers and the flooding of fertile lands, which could threaten the livelihoods and food production of the civilians living in Panama.
Conclusion
The drought affecting the Panama Canal is a wake-up call about how climate change is reshaping global trade. As businesses and governments seek for solutions, the future of supply chains depends on finding new shipping routes, better water supply methods, and smarter climate strategies. The big question now is how businesses and governments will adapt to this evolving crisis and whether the Panama Canal will remain a vital trade route in the future.
