The Panama Canal is experiencing a severe drought due to a record-breaking El Niño event, with water levels continuing to drop. In early August, dozens of ships queued at both ends of the canal, some stranded for over a week – one container ship even paid a record $4 million to cut in line.
Since May, Panama City has received only 75% of the average rainfall for the same period, while the western city of David has received only 60% in the past 90 days. The Panama Canal Authority stated that cumulative rainfall across the entire canal basin is 34% below historical averages, forcing the canal to adjust its operations to cope with the declining water levels. Starting in September, the canal will reduce the maximum draft of ships from the usual 50 feet to 48 feet, with further reductions expected, while daily throughput will be gradually reduced to 32 vessels. Companies such as Mediterranean Shipping Company (MSC) have announced increases in canal surcharges, effective September 12.
This crisis is rapidly spreading through the supply chain – not only are pharmaceuticals and electronics transported via the canal facing price increases, but it will also have a ripple effect on land transport. If canal delays continue, ships will be diverted to ports on the US West Coast, and goods will then be transported across the country by rail or truck. This will strain land transport capacity, drive up freight rates, and consequently increase the prices of various goods that have never been transported via the canal.
Iran's hardline stance on the Strait of Hormuz has already pushed up oil prices. If US energy exports are blocked via the canal, Asian countries attempting to replace Middle Eastern supplies with US crude oil will face a double increase in energy costs. Gerdan, a senior fellow at the Stimson Center, warned that the canal crisis is compounded by the impact of the Strait of Hormuz, "transportation costs not only pass on to consumer prices, but also push up all prices due to increased energy acquisition costs."
Zimmer, an expert at the Center for Strategic and International Studies (CSIS), pointed out that while the Strait of Hormuz has a limited direct impact on the US, approximately 40% of US container shipping relies on the Panama Canal. On August 10, Trump extended the waiver period, allowing foreign ships to transport energy goods between US ports to alleviate oil price pressures caused by the Iran-Iraq war. Data from the Cato Institute shows that as of August 11, at least 49 foreign vessels had passed through the Panama Canal during the exemption period, bringing the total number of vessels to 215 that have completed their voyages through the canal. If canal traffic falls to the levels seen during the 2023-2024 drought, the US economy will face a greater impact—though the effects will be more pronounced on the prices of consumer goods such as cell phones, computers, and agricultural products, rather than energy prices.
