Drought-induced drop in Panama Canal traffic could cost up to US$700 million

One of the most prominent trade routes in the world, the Panama Canal, has seen a 36% reduction in ship crossings due to a prolonged drought that started last year. One of the worst droughts to ever affect the country of Central America, it has caused mayhem along the 80-kilometer maritime channel, clogging up vessels and raising questions about the canal’s viability for international transportation as well as its impact on world trade.

Administrator Ricaurte Vásquez of the Panama Canal has revised his prior predictions of $200 million to $500 million, indicating that declining water levels might cost the canal between US$500 million and US$700 million in 2024. The latest cuts that Panamanian authorities announced on Wednesday are expected to have even more detrimental effects on the country’s economy. According to Vásquez, the number of ship crossings each day during regular canal operations will be reduced from 38 to 24 by the authorities. In comparison to the same period last year, he continued, the tunnel witnessed 20% less cargo and 791 fewer ships in the first quarter of the current fiscal year.

Vásquez acknowledged that it was a critical drop for Panama. However, he claimed that beginning in November and resulting in better water management had at least made sure that water levels remain sufficient for 24 ships to pass every day until the end of April, when the new rainfall period begins.

Authorities overseeing the canal ascribed the drought to both climate change and the El Niño weather phenomena, cautioning Panama that it was imperative to explore new sources of water for the canal’s functioning as well as human use. In addition to filling the canal, the lakes that support over 4 million people supply water to over 50% of the nation.

It comes at a risky time when the main commercial route between Asia and the USA is disrupted. The Houthi rebels in Yemen have attacked cargo ships in the Red Sea, forcing them to divert their vessels from the vital route that provides petroleum and consumer items. In order to avoid delays at the Panama Canal, some businesses had intended to divert to the Red Sea, which is a crucial route connecting Asia and Europe.

Due to cargo delays and increased transportation costs, the problems are having a significant impact on international trade.