The Panama Paradox

How the Panama Canal is losing clients and growing revenues

An image of a large container ship making its way through the Panama Canal.

The Panama Canal has entered an era of contradiction.

If in the last weeks you’ve heard any news about the Canal, it was likely about decreased rainfall and trade disruptions. That much is true. Over the last couple months, a nation-wide drought has brought water levels to a historical low, forcing the Panama Canal to restrict the flow of vessels. This, in turn, has caused a bottleneck to international trade in the Americas and beyond. 

Yet despite the hurdles, the Panama Canal Authority recently published its annual report for 2023. In it, we found what seems to be a contradiction. Despite low water levels and decreased flow starting in the latter half of the year, the Panama Canal saw revenues grow by 14.9%. Such is the modern Paradox of the Panama Canal. In a world of lower trade flow, the authority managed to increase profits. As it turns out, the way through which this happened is revealing of a difficult strategy and, perhaps, a broader signal to the world of trade. Most importantly, it shows that two seemingly contradictory realities can coexist when it comes to the Panama Canal.

But before understanding the increase in revenues we must look more thoroughly at the decrease in flows. As we mentioned briefly, Panama’s current struggles are tightly related with decreased water levels. The Canal itself is reliant on an artificial lake—Lake Gatún—which has historically depended on the country’s rainy season to fill up and allow the passage of multiple vessels. Every year, during the dry season, the lake loses a couple of meters worth of water only to be restored once the rainy season begins sometime in June or July. Yet this year due to a combination of climate change and the periodic El Niño event which affects climate patterns through warmer water currents, rain  has been a scarce occurrence for the country. By some metrics, rainfall is down 30% in Panama compared to previous years, making it difficult for Lake Gatún to reach the needed levels to operate at regular levels of traffic. The lack of rain even extended to the end of the year, making 2024 the year with the lowest initial water level in Lake Gatún to date.

Gatún Lake Water Levels (2018-2021)

A series of bar graphs showing water levels in the Panama Canal  distinguished by year and with projections for the rest of 2024.
(Data from LPanama Port Authority)

Almost immediately, the low water levels translated into a decreased ability to cross the Canal. In normal times, the Panama Canal is able to allow the safe passage of 36 ships from the Atlantic to Pacific oceans and vice versa. Since the onset of the drought, the number has been closer to 25 daily crossings with a recent limit of just 24—up from 22 at the end of last year. Roughly around October, the situation became unsustainable and daily crossings have seen a steady decline ever since. 

The situation promised to be a major disruption for global trade, as the Canal itself accounts for 3.5% of all commerce. If traffic flows were reduced by roughly a third, this would imply that nearly 1% of all global trade would suffer delays.

Seven Day Moving Average of Transits to the Panama Canal (2019-2022)

A line graph showing the 7-day moving average of transits across the Panama Canal from 2019 to 2024 with different series for each year.
(Data from Le Monde)

At least initially, such seems to be the case when looking at the average time needed to wait before crossing the Canal. In June of 2023, when the drought first began, average wait times at the Canal were 2.44 days for all vessels. By August, they had reached a high of 9.09 days before settling back to 3.1 days by the end of the year.

Average Wait Times in the Panama Canal across all Boat Types (2023)

Line graph showing the average wait times in the Panama Canal across all vessel types in 2023
(Data from Panama Canal Port Authority)

Yet despite these immense hurdles, the Panama Canal Authority surprised the world last month when it released its annual report for 2023. Of all the facts and figures in the document, one stands above the rest: revenues actually increased despite the drought. And they did so by a meaningful 14.9%—the Canal itself boasted of making “the largest historical contribution to [Panama´s] National Treasury, reaching B/.2.55 billion [equivalent to $2.55 bn].” Such is Panama’s Paradox. In the face of adversity and disruptions, the Panama Canal actually saw a meaningful increase in revenues and, by extension, in profits.

The explanation behind this seeming contradiction goes back to an early decision from the Canal Authority in January 2023. In an attempt to consolidate its multiple tariffs—numbered in 420 before the new legislation—, the Canal created a new system that effectively reduced tolls to just 60 tariffs. With it, however, the Canal also raised the overall cost of those tolls across all ships. The most affected segment of vessels were container ships which would see increases of up to 8% in toll payments and represent the most prominent source of traffic in the Canal (representing 22% of al crossings in the Canal). Importantly, the announcement for the authority included increases for 2024 and 2025 as well, signaling the Canal intended to further increase revenues in years to come.

The increases in toll fees are, in turn, the leading explanation for Panama’s miraculous growth. Instead of decreasing the cost of accessing the Canal in the face of a crisis, the authority doubled down on its decision and continued to charge increased toll fees. Thus, between 2022 and 2023, toll revenue for the Canal grew from $3 bn to $3.34 bn. To put this into perspective, between 2021 and 2022, the increase was from $2.97 bn to $3 bn. Combined with other streams of income, the Canal Authority registered a total revenue of $4.96 bn.

Panama Canal Toll Revenue (2023)

A bar graph showing the revenues in billions od dollars from Panama Canal tolls between 2021 and 2023
(Data from Panama Canal Port Authority)

Yet it wasn’t just the tolls themselves that spearheaded this growth. There’s reason to believe the canal itself favored container ships over other vessels when crossing the canal which, in the new toll fee, would receive the largest increase in tariffs. If we return to looking at wait times and differentiate by vessel type, we will notice that container ships were, quite noticeably, the least affected by the drought. While general cargo ships saw wait times jump from 3.21 days in June to 9,36 days in September, and dry bulk cargo ships went from waiting from 2.81 days to 8.67 days, containerships actually experienced a decrease in wait times from 0.23 days to 0.11 days. In a way, it even seems as they were getting a preferential tratmenrt—although, again, this could be the result of being the most prominent type of ship to cross the canal. While it’s difficult to make strong conclusions from this fact alone, it does suggest that the canal, in times of adversity, gave a proprietary treatment to containerships which happened to represent an increased source of revenue under the new toll system.

Average Wait Times in the Panama Canal by Cargo Type (2023)

A line graph showing average wait times in the Panama Canal across vessel categories in 2023
(Data from Panama Canal Port Authority)

Above all, Panama’s reluctance to decrease fees signals at a complex pattern. Even with trade disruptions, Canal Authorities seem unwilling to easen toll fees. If this were a one time occurrence, it would make sense to hold fast to such beliefs. However, given that climate change is likely to exacerbate Panama’s weather in years to come and make droughts an ever more common phenomenon. Eventually, the Canal will have to encounter the tough reality that its traffic flows just won’t be the same as in previous years. The only means to maintain growth, then, will be to keep increasing toll fees significantly. Whether such a strategy is feasible or desirable in the future remains to be seen. For now, all we can do is wonder at Panama’s present achievements and its ability to overcome great odds to maintain revenue growth.