Panama’s unique location straddling the Pacific and the Caribbean helped the country develop as one of the world’s most crucial shipping crossroads and entrepôts. The economy’s principal asset is, of course, the 82-kilometer, 109-year-old Panama Canal, which traverses the isthmus. And what an asset it has been: the canal enables shippers to short circuit a 15,000-kilometer journey around South America.

In the era of rapid globalization, the canal propelled the country’s growth to one of the highest in Latin America. GDP increased at an average rate of 5.5 percent between 2000 and 2022, compared with 3.6 percent in the two decades prior to Panama’s takeover of the lucrative route in 1999. But the good times are no longer rolling, in part because unlike other vital shipping bottlenecks, the canal floats ships on freshwater rather than seawater.

Why This Canal is Different

Each ship needs approximately 50 million gallons of freshwater to traverse the Canal and its locks, which raise (and lower) ships 85 feet during transit. And historically, availability of water has not been an issue. With tropical deluges to draw on, one would hardly expect Panama to face shortages. However, for the past six years, the canal region (along with much of the rest of Central America) has suffered from below-average rainfall. Moreover, rainfall is always seasonal, necessitating storage. And the duration of the dry season is stretching; in 2023, it commenced a month earlier than usual and may last a month longer.

Water levels have dropped significantly at lakes Alhajuela and Gatun, which supply the water to the canal. And there is no relief in sight. The complex El Niño weather phenomenon in the Pacific set in this fall, and meteorologists expect it to persist well into 2024. In Panama, El Niño generally mean lower-than-average rainfall. Meanwhile, forecasts on the effects of climate change over the coming decades all point to rising temperatures and decreased rainfall in four of Panama’s climatic zones, including Chiriqui province — the country’s central agricultural district.

It’s a Big Deal

The Panama Canal handles around 6 percent of world shipping each year, and is a crucial source of Panama’s income, accounting for $2.5 billion in direct contributions to the national treasury in 2022. To compensate for the decreased water depth, canal operators have lowered ship weight limits, resulting in up to a 40 percent reduction in cargo capacity. Indeed, in some cases, draft restrictions have forced the unloading and reloading of containers, with rail carrying the excess weight across the route.

Typically, 40 ships traverse the isthmus each day, but the drought reduced capacity to 25 in November with the prospect of further cuts to 18 by mid-winter. The decrease in daily crossings has already increased ship wait times at the canal from hours to weeks in a business in which time really is money.

Looking down the road, frequent droughts could lead shipping companies to diversify their inter-ocean routes. One possibility is to switch to rail across the U.S. Another is to circumnavigate South America by ship — or even to reroute shipments from Asia to the North Atlantic via the Suez Canal.

For the longer term, Colombian President Gustavo Petro has revived the possibility of building a train routefrom the Pacific to the Caribbean. Mexican President Andrés Manuel López Obrador, for his part, is floating the idea of renovating the train crossing the 220-kilometer Isthmus of Tehuantepec corridor along the narrowest part of Mexico.

None of these routes would be economically competitive with the Panama Canal if the canal were in top shape since it would involve loading and unloading ships at either end. But that’s a big “if.”

Over the long term, the canal might be even more vulnerable. Climate change will almost inevitably make the Northwest Passage through the Arctic routinely viable for navigation for many months a year. That route would stretch 8,600 nautical miles compared with 10,500 nautical miles through the Panama Canal, with no waiting time or transit fees.

Who Gets Priority?

With declining water supplies, Panamanians are developing a zero-sum mentality, perceiving that increased water use in one area reduces supplies for other services. The country is facing a shortage of drinking water, which unsurprisingly is trapping government water planners between a rock and a dry place. Consider, too, that agriculture and mining also depend on shrinking water supplies. And water issues associated with the development of the country’s massive copper mine, Cobre Panamá, have spawned violent protests over a new government contract signed with the mine’s owner, First Quantum Minerals.

The government demanded a fresh contract because royalties paid to the state have been minuscule compared to the mine’s profits since 2019. FQM has agreed to raise the minimum annual payments to $375 million. However, protesters claim the new contract also opens the door to more environmental damage — and most relevant here, threatens the availability of both potable water for urbanites and resources to operate the canal. As one leading expert noted, “It is a contract to basically put up for sale our entire national park system and watersheds that are critical for the survival and operation of the Panama Canal.”

Panamanian President Laurentino Cortizo announced a binding referendum on December 17 to decide the fate of the mining contract, and said he would reject all new applications for metal mining concessions along with those already in process. The revenue loss will be considerable, further constraining the government’s options in responding to the water crisis.

What Next?

Water shortages also imperil the canal’s expansion plans. A $5.25 billion canal expansion in 2016 tripled the size of vessels it could accommodate and doubled its capacity. Currently, the canal carries over two-fifths of all the goods traded between Asia and the U.S. This trade will likely decline with time if the canal is not further expanded, as it cannot support high-efficiency “ultra-large” vessels. However, expansion is a non-starter unless the water supply can be secured.

Ways to raise water levels are currently under study. One possibility is to create a third artificial lake and connect the Indio River to Lake Gatun. However, there is concern that deepening Lake Gatun may cause the nearby mountains to collapse (really). The option favored by the canal authority involves building a reservoir on the Indio River. But this project also faces fierce opposition — this time from local groups in the area that the reservoir would flood.

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Thanks to geography and fine engineering, the Panama Canal long had what amounted to a monopoly, a gift that would keep on giving and giving and giving. But here, as in dozens of other circumstances, climate change is changing a sure thing into a race against time. This decade, the problem is water scarcity. A decade or two down the road, there will be others to contend with — for example, the almost inevitable collapse of Western Antarctic ice sheet, which will raise the sea level by about 15 feet. But that’s a worry for a different article.