Panama Canal Is Going Dry

Panama Canal is going dry as a severe drought has caused water levels in the lake that feeds the locks in the Panama Canal to drop far below normal.

Federal Reserve Chair Jerome Powell keeps careful track of employment levels, wages, consumer prices and numerous other metrics to see where the US inflation rate may be headed in the next year.

He might also want to keep an eye on water levels at Gatun Lake.

That’s the lake that feeds the locks in the Panama Canal with the fresh water needed to raise vessels as they pass from the Pacific Ocean to the Atlantic. But a severe drought has caused water levels in the lake to drop far below normal, resulting in weight limits and rising surcharges for vessels traversing the canal.

It’s also unnerving economists and supply-chain experts. Just as the world’s delivery bottlenecks are easing, Panama’s drought and worrisome weather patterns elsewhere threaten to revive some of the chaos of 2021, when a surge in shipping costs and consumer demand resulted in shortages of goods, helping to drive US inflation to a four-decade high.

If Gatun Lake levels keep falling as forecast, the market reaction will be higher shipping rates and a scramble to find alternative routes from Asia to the US, logistics experts said. 

The drought also risks undermining the Fed’s battle to get the rate of inflation closer to its 2% target, said Jonathan Ostry, an economics professor at Georgetown University and a former International Monetary Fund official. 

US inflation is gradually slowing according to the Fed’s preferred gauge, yet at 4.7% remains “at a level that is very uncomfortable for central banks,” Ostry said. “And the last thing they need is to tune out unfavorable news about shipping” as they did in 2021, which he called “borderline malpractice.”

The Panama Canal Authority is forecasting a July 31 water level of 78.2 feet (23.86 meters), beating the previous all-time low of 78.3 feet reached in May 2016 and far below the five-year average of 84.9 feet for July. 

Making matters worse, an El Niño system is building in the western Pacific Ocean and is expected to upset normal weather patterns by the end of this year. While this can cause heavy rainfall in some regions, in Panama it typically means severe drought and higher than normal temperatures. Erick Córdoba, the head of the canal’s water department, in an interview said El Niño could mean a longer dry season for Panama in 2024, which would also affect water levels. 

The drought already is making it more expensive to move goods. The canal authority has steadily reduced draft levels – how low a vessel can sit in the water – since February. To comply with lower drafts, large ships must lighten their loads by taking fewer containers overall or by dividing the same amount of cargo among more containers. Either way, the result is higher price tags for consumer and industrial goods that move through the canal. Some ocean carriers also began charging per-box container fees on June 1 in response to the draft limits.

Cargo rates will rise on other routes, too, if low water levels force shippers to find alternatives—especially if the peak shipping months of August and September, when retailers build inventory ahead of the holiday shopping season, is stronger than expected.

One bright spot is that maritime shipping costs and demand levels have declined sharply from last year. A glut of inventory-clogged warehouses and worries about the broader economy put the brakes on new orders. Still, large volumes of cargo are moving, with demand at about the same level as in 2019, according to Peter Sand, who is chief analyst for Oslo-based Xeneta AS, which tracks shipping rates.

While the Panama Canal has struggled with water shortages since before a 2016 expansion that allowed giant container vessels, called Neo-Panamax ships, to pass through, this year’s drought started earlier and is projected to be more severe than previous ones. Ricaurte Vásquez, the Panama Canal Authority’s administrator, in a statement said May was the driest May since 1950 and that if things get really extreme this year, the canal could be forced to cut the number of ships it transits each day to between 28 and 32, from as many as 36 now. 

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