The World’s Shortcut: How the Panama Canal Works.

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The purpose of the Panama Canal is pretty easy to understand. It brings the US west coast closer to the Europe, and it brings the US East coast closer to Asia.

panama canal trenches

These rather short 180 foot or 55 meter wide trenches are, combined, perhaps the single most important and most influential waterway on Earth. That’s because the entire shipping industry worldwide is shaped by the Panama Canal.

Hundreds of year ago, the opportunity of a canal across the narrow country of Panama was identified. After a few earlier false starts, the Americans went down to Panama in 1903, signed a fairly dubious treaty granting them land, dammed up a river to make an artificial lake, dug a trench from that lake to the Pacific, dug a trench from that lake to the Atlantic, and $13 billion and 5,600 worker fatalities later, the canal was done.

It officially opened the Pacific to the Atlantic on August 15, 1914 as the first commercial ship, the SS Ancon, sailed through.

Now, the Panama Canal is not just one straight shot from ocean to ocean. That’s because the artificial lake they created, Gatun Lake, is 85 feet or 26 meters above sea level. So, a cargo ship, which can weigh more than a billion pounds, need to get up those 85 feet or 26 meters and then back down again to transit from ocean to ocean. Like most canals, to do this, the Panama Canal uses locks.

From the Atlantic side, for example, a ship will be pulled into the first lock by the tug trains on each side of the canal, the downstream gate will close, water from upstream will be fed in to fill the lock, the ship will float up, then once the water level rises to match that of the next lock, gate will open, and the ship will be pulled into the next lock. Then, the gates will close, the water level will rise again, the gates will open, then this will happen one more time until the third lock raises the ship to the water level of Gatun lake- those 85 feet or 26 meters above sea level.

Believe it or not, it is these three locks exclusively that limit what size a large portion of the world’s container fleet can be. A ship has to be under 1,200 feet or 366 meters long and 168 feet or 51 meters wide to be accepted in the Panama Canal and so a huge proportion of the world’s ship are built to be exactly this size. This class of the ship is called NeoPanamax or New Panamax or Post Panamax depending on who you ask.

Of Course, there are certainly ships larger than the NeoPanamax size. The Panama Canal has a size limit of about 15,000 TEU or twenty-foot equivalent units. That’s a measure of a ship’s capacity based off how many of these twenty-foot containers they can carry. Now, the largest container ship in existence, the HMM Algeciras has a capacity of over 23,000 TEU. This ship like many of those larger than 15,000 TEU, exclusively keeps to the East Asia to Europe route as it can’t efficiently make trips that require transit between the Pacific and Atlantic since it would have to circumnavigate South America.

But it was really not long ago that the largest ship that could go through the Panama Canal were far smaller than the current 15,000 TEU size. You see, up until 2016, the Panama Canal could only fit ships smaller than 5,000 TEU. That’s because up until 2016, these didn’t exist- the Panama Canal’s new locks. The old locks can only fit a ship 106 feet or 32 meters wide but still, given the enormous importance of this waterway, ships were still then built specifically to fit through.

In fact 50% of the old lock’s users were exactly as wide as the width limit suggested they were likely built for exactly that purpose. This was a problem for the Panama Canal, though, because, believe it or not, the canal has competitors. It all has to do with geography. When travelling from east Asia to the US east coast, which is one of the busiest shipping routes in the world, it really is not all that much further to go west than east. Going from Hong Kong to Newark, for example, the distance heading west through the Indian ocean, Suez Canal, Mediterranean, and Atlantic is only a few hundred miles or kilometers longer than going east across the Pacific and through the Panama Canal.

Meanwhile, the Panama Canal is not cheap. They charge a $90 toll per twenty foot container meaning that most ships, carrying thousands of loaded containers, pay hundreds of thousands of dollars for just a single transit. With the new locks and there higher capacity, single ships can possibly be assessed more than $1 million per transit if they’re the largest size, fully loaded.

The Suez canal, meanwhile, typically charges lower tolls. A ship sailing that Hong Kong to Newark route therefore might choose to take the slightly longer route via the Suez Canal versus the Panama Canal as, in the end, when you consider the tolls, it might end up being less expensive. Now, both canals are constantly changing their fees in order to compete with the other but still, throughout the past decade, the Suez Canal seems to maintain a slight edge in the cost.

The Panama Canal’s other competitor, though is trains. For the crucial east Asia to US east coast route, going through the Panama Canal, while much faster than circumnavigating the continent, is still not a direct route. On the Hong Kong to Newark route, the Panama Canal represents an almost 3,000 miles or 5,000 Kilometer diversion from the alternative- crossing the US by land. It is pretty standard practice to ship cargo from east Asia to Los Angeles and then load it up on trains to get to the US east coast. While overall this usually ends up a little more expensive than going through the Panama Canal, it saves about a week in transit time and, for many shippers, this is worth it.

Trains, with their relatively low cost, represent a considerable competitor to the canal, and it is the competition with both these and the Suez Canal that pushed the Panama Canal to make an expansion. That’s why they spent $5.4 billion to build these bigger locks that could fit larger, 15,000 TEU ships. This would let more of the world’s shipping fleet let through and these bigger ships, thanks to economies of scale, have lower cost per container which helps make the canal more attractive in comparison to its trains or Suez competition.

Now, this expansion is a great example of the butterfly effect. In one instance, because the Panama canal widened its size limit by a few dozen feet, the state of New Jersey had to spend $1.7 billion to raise a bridge by a few dozen feet. You see, in order to get to much of the port of Newark, which is one of the largest and busiest in the US, ships have to pass under the Bayonne bridge. As a huge proportion of the shipping traffic to the US east coast goes through the Panama Canal, before the new set of locks many of the ships that wanted to use the port of Newark were the smaller 5,000 TEU size which could all fit under the Bayonne bridge, sitting at 151 feet or 46 meters above the water. With the canal expansion project, though, more ships would start making their way to Newark that would be too large to fit under the Bayonne bridge. Therefore in order for the port of Newark to stay competitive, they just had to raise that bridge.

Still today, though, many ports on the east coast do not have the depth and facilities needed to handle these NeoPanamax ships. This, though, presents an opportunity for the Caribbean. Deep-water ports in the Caribbean are developing themselves into major transshipment hubs. What these are are ports where larger ships, like the largest 15,000 TEU container ships that can now go through the Canal, will unload their cargo which will then be loaded again onto smaller ships bound for smaller ports closer to the cargo’s destination up and down the east coast.

Sometime soon, though, something could happen that would simultaneously great for the Caribbean ports but terrible for the Panama Canal. You see, two countries to the North of Panama is Nicaragua. By linking both the Atlantic and the Pacific to the large Lake Nicaragua, one could have another connection between the oceans. There has been a long history of attempts to build this canal, most recently in the past decade with a failed scheme by a Chinese billionaire. There are no current construction plans, but at least somewhere the world is going to need more canal capacity between the Pacific and the Atlantic.

The shipping industry is growing at a solid rate of about 5% annually and the Panama canal can only expand so much. One issue is that the Panama canal could literally run out of water. You see, each time the canal’s locks open, millions of gallons of water flow out and downstream. Usually this is not a problem because lake upstream has enough water, but sometimes, during periods of reduced rainfall, there just won’t be enough water to both release the amount needed to operate the locks and keep the lake at a deep enough level for the largest ship to transit.

All told, what happens in Panama affects the world. If a drought in Panama restricts the throughput of the canal, the world economy will feel it. That’s because shipping is what connects the world’s economy and the Panama canal is one of the most important connectors in shipping. The canal effectively brings the economies on one side closer to those on the other and so, no matter what happens, it will continue to serve as the world’s shortcut.

Here is a very interesting video by Wendover Productions explaining how the Panama Canal works:

So now you know…

Source.

Rgds, Sailor

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