A new normal is settling in for the Panama Canal as the low-water crisis fades and business as usual returns. But what is the real state of affairs of the Panama Canal, Latin America’s greatest economic engine?
It is a mere 40-miles shoreline-to-shoreline in length, yet it is the most important transportation corridor in the Americas, North and South, handling an estimated $440 billion in freight annually. That’s the legacy of the Panama Canal.
But as the Panama Canal emerges from the low-water crisis and a ‘new normal’ settles in, the question emerges what is the real forecast for the Canal? What does the future hold for Latin America’s greatest economic engine?
Back in late July, Federal Maritime Commission (FMC) Chairman Daniel B. Maffei and Commissioner Louis E. Sola visited to Panama to assess how the conditions at the Panama Canal were impacting US shippers. Maffei and his colleagues met with Jose Ramón Icaza Clément, Minister of Canal Affairs at the Panama Ministry of Canal Affairs, Ricaurte “Catin” Vasquez Morales, Administrator of the Panama Canal Authority (ACP), Luis Roquebert, Administrator of the Panama Maritime Authority and Juan Carlos Navarro, Minister of Ambiente (Environment) to appraise the impacts of the drought on Canal operations and get a first-hand sense of the long-term solutions to the periodic problem of drought and low water.
The FMC’s concern for US freight interests is understandable. In terms of destination and origin, the US accounted for nearly 208.8 million long tons of Panama Canal freight – easily making the US the number 1 partner. In comparison, China was a distant number 2 at 64.4 million long tons.
As Maffei explained in his summation of the trip, “In 1914, the Panama Canal revolutionized trade and navigation in the Western Hemisphere. For more than a century it has made it easier and more economical for ships to transit from one ocean to the other. It has been an asset of such dependability that it is easy to forget what an engineering feat it was to build this route and the effort necessary to maintain it. It is clear from our meetings that the Panamanians want to maintain the viability of the Panama Canal and are identifying what options they have for improving its resiliency and reliability. Rainfall has alleviated some of the most immediate challenges plaguing the Panama Canal, but waiting to implement more permanent solutions based on new infrastructure would be an opportunity lost.”
El Niño and the Houthis
The Panama Canal is a canal like no other. It relies on Lake Gatun to provide the water to lift the ships through the locks for the 50-mile transit. In early 2023, the weather pattern known as El Niño induced a drought that dropped water levels in Lake Gatun. This is nothing new. The El Niño is regularly occurring climate pattern that involves above-average sea surface temperatures in the central and eastern tropical Pacific Ocean. It is often followed by La Niña, a “cold event” in the Pacific that triggers a restoration of the normal rainfall pattern.
But 2023-2024 was a much more severe El Niño and as the drought limited the supply of water, the number of vessels transiting the locks also had to be cut. By December the ships allowed to use the locks had been reduced from the normal 36 to 22 and the queue to use the Panama Canal was nearly in triple figures. Vessel operators upwards to $4 million bid to jump the queue.
But the Panama Canal’s problems weren’t in isolation. They are part of the ongoing stress on the global supply chain, as 7,700 miles away the Houthis assault on vessels transiting the water in the Red Sea, effectively choked off the Suez Canal cutting services between Asia and Europe and the relay strings to-and-from the Americas. And the alternative to the Suez Canal route was the much longer voyages — roughly an additional 4,400 miles on a voyage from Asia to Europe.
For Asian voyages to and from Latin America’s Caribbean and South Atlantic ports this is a major complication. Additionally, while the connection between Latin America’s Pacific ports to Asia is unaffected, routes through the Panama Canal to the East Coast of the US and to Europe are strained by the Canal’s periodic droughts. It is worth noting that Chile, Mexico, Peru, Colombia, Ecuador, Panama, Trinidad and Tobago, Brazil and El Salvador all rank within the top twenty nations using the Panama Canal in terms of long tons.
Ultimately what the Canal authority must tackle is how to ensure adequate water levels for the Canal and at what cost - both financially, socially and environmentally?
The Mexican Alternative?
The El Nino drought and the subsequent throttling of ship traffic through the Panama Canal has again sparked interest in developing an alternative to crossing the Central American isthmus. Mexico is pushing ahead with their $2.8 billion Tehuantepec’s Interoceanic Corridor (CIIT) project. This isn’t the first Central American competition for the Panama Canal. Nicaragua long has wanted to build an alternative canal to compete with the Panama Canal, but the project has never been feasible for numerous reasons.
But Mexico’s CIIT project is taking another approach to building a freight route to link the Pacific Ocean to the Gulf of Mexico. The initiative proposes crossing Isthmus of Tehuantepec in southern Mexico — the shortest distance between the Pacific Ocean and the Gulf of Mexico — with a 188-mile rail corridor that could handle up to 1.4 million TEUs annually by 2033.
The CIIT project faces considerably fewer obstacles than the defunct Nicaraguan Canal. For starters, the engineering is considerably easier than building a new canal across the Central American isthmus. The obvious advantage of the rail system is unlike the Panama Canal, El Nino would have little impact on the volume of freight transits. And the rail corridor already exists and is used for among other freights, shifting autos and auto parts from the Pacific side to the Gulf. But the scale of the project pale in comparison to the Panama Canal. The Panama Canal is roughly a fifty-mile transit while the CIIT is 188 miles long. And quite aside from the overhaul of the rail corridor the ports of Coatzacoalcos and Salina Cruz would need major terminal upgrades to handle the proposed traffic. And ultimately even with the most optimistic numbers that the CIIT could handle (1.4 million TEUs) is but a fraction of what the 8 million plus TEUs Panama Canal is currently handling — a number which is likely to be substantially larger in 2033. While the CIIT project doesn’t look like a real competitor to the Panama Canal it does hold promise as economic kick starter for the region. As part of the project, 10 industrial parks will be built in the area surrounding the railway to encourage economic investment and industrial development in the region. And while it might provide alternative route in the event of another El Nino type low-water disruption, the proposed volumes are likely to be absorbed largely by increase in regional economic activity rather than as conduit for freight from Asia to the East Coast of America.
Balancing Water Management
Aristides Royo Sánchez, Chairman of the Board of Directors and Minister for Canal Affairs, wrote in the introduction to the authority’s annual report, “… it is important to highlight that, due to water scarcity, the Panama Canal has foreseen a decrease in transit volume and total tonnage for FY-2024, while investments and capital reserves for future projects are expected to grow by 26.4%. Among the investments that stand out are solutions for water availability…” And managing the water levels for the Panama Canal is a tricky balancing act. The Gatun and Alajuela Lakes need to provide 52,000,000 gallons of fresh water for a single ship’s transit while the Panama Canal Authority’s target is 36 transiting ships per day. In addition, the lakes need to supply water for 2.5 million residents of Panama City and Colón who depend on water from the Chagres River for their drinking water and municipal wastewater treatment. Finally, there is hydropower generated by the two lakes to support Canal operations. As Panama Canal Administrator Morales said in an August release, “In Panama, we have a high dependence on rainfall, and it is necessary to increase storage capacity to ensure drinking water and transit water. In the operation of the canal, including the third set of locks, we use the volume of water that was forecast for that purpose, whereas the consumption of the population increases permanently.”
This is not to say that the ACP isn’t trying to conserve water. The Canal has deployed a number of water-saving measures including cross-filling locks, water saving basins, simultaneous lockages [when possible, two ships are allowed to transit through the same chamber at the same time], the shutting down of the hydroelectric plants and reducing the number of transits during low-water periods. The Canal employed a reservation system during the drought for all vessels while about 70% of the transits were booked in advance prior to the drought.
But as Canal Administrator Morales explained in a September presentation at the 2025 Investors Forum, organized by the Latin America Stock Exchange (LATINEX), “While there is no simple answer or single project that can immediately solve the challenge of water, we remain steadfast in our search for innovative solutions.” And one of the innovative solutions is building another reservoir. In July, the ACP announced that it would build a new reservoir in the Coclé province, west of the Panama Canal. The proposed Rio Indio reservoir project is forecast to secure the Canal’s freshwater needs for the next half century at a cost of around $1.2 billion plus an additional $400 million in investments in neighboring communities. The man-made reservoir project is expected to take six years to build. And while the approach is innovative, like the water re-use in the locks, this is a recycled idea. The U.S. Army Corps of Engineers (USACE) and the ACP contemplated building a reservoir in the late 1990s. But the recent prolonged El Niño/Southern Oscillation (ENSO) event emphasized the need for another fresh-water source to enable the Canal to continue operating a 36-daily transit scenario.
Nonetheless, in the meantime it is likely there will be another El Niño event, as they occur in two-to-seven-year cycles, and how the ACP balances water against schedule reliability may be tested again.
