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At the time of its construction, the Panama Canal was (and to a great extent still is) a marvel of modern engineering. But it is also a single point of failure in a global mesh of tightly coupled supply chains.
In a normal year, Panama is one of the wettest countries on the planet. But this is no normal year; it is an El Niño year. As a result, Panama has experienced a longer than usual dry season and a dryer than usual wet season, making this the driest year for the country in five or six decades, according to Ángel Muñoz, the head of the climate services team at the Barcelona Supercomputing Centre.
The drought is already having a major impact on the Panama Canal, one of the world’s most important waterways and a huge source of revenues for both the local economy and the government. The 109-year old canal draws on millions of gallons of fresh water from nearby reservoirs to move ships up and and down as they pass between the Pacific Ocean and the Caribbean sea. A slowdown in this process could have significant knock-on effects for global supply chains, adding yet more inflationary pressures into the mix.
Roughly six percent of the world’s maritime commerce passes through the 50-mile (82-km) long canal, according to the Organisation for Economic Cooperation and Development (OECD). Annually, around 14,000 ships make the journey across the Isthmus of Panama. But the figure is down by close to 20% in recent weeks after the Panamanian government reduced the daily limit of the number of vessels from 38 to 32, in response to near-record low levels of water in the two reservoirs that feed the canal.
The result has been a long logjam of container ships. On September 2, there were 125 ships waiting in line. That’s down from just over 200 a couple of weeks ago, an unusually high level, but it’s still well above the long-term average of around 90. According to an article on Bloomberg, some ships are paying as much as $2.4 million to skip the queue. Last week, the government extended the restrictions, which began at the beginning of this year, for at least another 10 months.
Plan B Options?
The idea of building a mega infrastructure project somewhere in the Americas to connect the Atlantic and Pacific oceans, and thereby avoid having to circumnavigate the entire American continent to transport merchandise from Europe to the Far East or vice versa, has been around for centuries. But it wasn’t until the end of the 19th century, following the successful construction of the Suez Canal in Egypt, that work began on the Panama Canal, which was finally inaugurated in 1914.
At the time, it was (and to a great extent, still is) considered a marvel of modern engineering. But like the Suez Canal, it is also a single point of failure in a global mesh of tightly coupled supply chains. It lets ships move from one side of the Americas to another in a matter of hours, reducing the sailing distance from the Atlantic to the Pacific and vice versa by a whopping 8,000 nautical miles.
Trade between the West and the East would not be the same without it. But if the problems with water scarcity continue and the queues keep building, what alternatives are there, aside from rounding the southern tip of Chile, with all the risks, added time and costs that entails?
The answer, for the moment, is not many, but that could be set to change. The US does, of course, have a land bridge, where freight trains ferry containers between the Atlantic Coast and the Pacific Coast. But it is costly and time-consuming. Meanwhile, at least three governments in Latin America are dusting off old infrastructure projects that may, one day, yield cheaper and quicker transit options.
They include Colombia, whose President Gustavo Petro this week called for a thorough reexamination of the feasibility of constructing a rail link between Santa Marta, on Colombia’s Caribbean coast, and Buenaventura, Colombia’s biggest Pacific port.
The project has been gathering dust for over a decade. In 2011, the FT reported on China’s growing interest in creating alternative routes to the Panama Canal. The goal was to build a 220-kilometre railway line linking up Colombia’s Caribbean and Pacific coastlines capable of transporting more than 40 million tons of cargo annually. However, the mega-project, which would have involved significant destruction of fauna and flora, never got off the ground. But now Petro wants to get it on back on track (apologies).
Nicaragua’s government is also talking about reactivating a stalled rival project to the Panama Canal. In 2012, Nicaragua’s long-standing President Daniel Ortega signed an agreement with Chinese company HKND to build a canal linking the Caribbean coast with the Pacific Ocean. However, shortly after the announcement, the project was halted due to non-compliance with environmental requirements, the bankruptcy of the project’s main Chinese backer, Wang Jing, and the Panama Canal Authority’s announcement in 2014 that it was expanding the canal. Construction on the Nicaraguan canal remains stalled to this day and is likely to stay that way unless Ortega is able to rekindle Chinese interest.
There is one other alternative: Mexico’s Interoceanic Corridor of the Isthmus of Tehuantepec (CIIT)…
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Nick Corbishley 