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The drought in the Panama Canal

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By Diego Balverde

· 4 min read

The drought in the Panama Canal is something that should concern all of us on this planet since it has the potential to stop or delay trade and generate additional costs, which are directly passed on to the products we consume daily.

The situation

The area surrounding the canal is currently experiencing one of the driest years in the country's 143-year recorded history. The "El Niño" weather phenomenon, associated with warming water surface temperatures in the eastern and central Pacific Ocean, is contributing to the drought in Panama. Major drought patterns have increased significantly with "El Niño" during the last 25 years, marking a significant development in the canal's 109-year history.

The longer-than-usual prolongation of the dry season signifies a natural phenomenon with serious global implications. An administrative decision to reduce daily traffic and the weight of shiploads by 20% due to water shortages caused by prolonged drought has exacerbated the immediate technical and operational consequences. This will inevitably result in a slowdown in maritime traffic accessing the canal, leading to congestion at nearby ports, container unloading delays, and increased costs, all of which will ultimately be borne by end consumers.

Consequences: "The economic hit"

Undoubtedly, this situation will have significant financial consequences, with Panama anticipating an annual income reduction of 8 to 15% during the 21 days of the traffic reduction measures, estimating losses of 300 to 700 million dollars. More importantly, these delays will translate into higher prices and contribute to an increase in global inflation. Drought-induced delays result in cost overruns, which are then directly reflected in the prices of transported cargo.

In addition to this, many ships are forced to reduce their loads at unscheduled ports along their trade routes, resulting in widespread losses that affect everyone through increased costs in finished products. This is causing daily losses in the millions for shipping companies and their customers, who rely on these products to maintain the flow of trade.

The Financial Aggravation: "With high interest rates and subdued inflation in the United States, early PPI indicators will reveal the consequences in the next 20 days."

Impact on Europe

Europe, which typically stockpiles goods for autumn and winter at the end of summer, will face medium-term delays that can be described as nothing less than "shortages" for the market. If low water levels in the basins persist, environmental damage will be immediately reflected in prices and lead to prolonged scarcity. Consequently, the European continent may experience a substantial impact on its economy, with reduced consumption within the European Union due to potential shortages. This will cause a contraction in the financial sector due to decreased daily commercial flow resulting from a lack of raw materials. If the drought-induced shortage persists, the European economy will be severely affected, potentially driving up inflation.

Global impact

This situation affects more than 170 countries and a wide range of products, including soybeans and liquefied natural gas from the United States, which are crucial for European winter. Food shipments have also been disrupted, with bulk carriers transporting staples such as corn and iron ore, along with tankers carrying oil, fuel, gas, and chemicals for agricultural production. If the drought and traffic delays continue to escalate, the rest of the planet will inevitably bear the brunt through rising prices and shortages.


The gravity of this situation places the world economy in jeopardy, especially at a time when it is recovering from the losses incurred during the Russia-Ukraine War. This adds further uncertainty to an already fragile global economy, where natural disasters signal the seriousness of the situation. If the drought in the Panama Canal persists, it could disrupt the entire supply chain, potentially affecting other critical sites like the Suez Canal or Turkey.

Anyone involved in global product shipping should closely monitor potential disruptions caused by climate change. The Panama Canal serves as a glaring example of a pressing issue that affects all of humanity, one that needs to be addressed at COP28 in Dubai. Since the International Maritime Organization (IMO) has failed to find solutions to water warming and emissions from ships to transported products, reducing Scope 3 emissions remains a crucial challenge for humanity.

If this situation continues, it will become increasingly difficult for the Panama Canal to accommodate larger ships. The associated economic losses will have repercussions throughout the financial system, impacting commodity trading markets and international stock markets.

illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.

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About the author

Dr. Diego Balverde is an Economist at the European Central Bank and has extensive experience in climate finance. He is currently also an Advisory Member of the Council of Foreign Trade at The World Bank. Diego is very active on the international sustainability stage having attended COP27 as a Circular economy for Climate Change specialist and will also be attending the G20 Conference in India as part of the Energy, Sustainability and Climate Task Force. Diego holds a PhD in Foreign trade from Chapman University and an MBA degree from Cambridge Judge Business School.

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