The cost to transit the Panama Canal has surged to unprecedented levels, driven by two simultaneous global forces. The intensifying El Ni帽o weather pattern is depleting canal water levels, while the closure of the Strait of Hormuz is sparking a sharp rise in energy transport demand. These combined pressures are creating a severe supply-and-demand squeeze on one of the world's most vital shipping routes.
According to the latest report, since August, the average daily auction slot price for the canal's commonly used locks has reached approximately $1.1 million. This figure is more than 16 times the average price seen during the same period last year.
The Strait of Hormuz is a critical passage for roughly one-fifth of the world's oil. With its closure, Asian buyers are being forced to source crude oil and petroleum products from the U.S. Gulf Coast. This supply route necessarily requires crossing the Panama Canal, directly driving up demand and transit prices.
Simultaneously, El Ni帽o is accelerating. The National Oceanic and Atmospheric Administration (NOAA) has noted that the El Ni帽o event, which began strengthening in June, could be more intense than in previous years. El Ni帽o typically causes higher sea surface temperatures in the Pacific, leading to severe drought conditions.
The canal's water source is the man-made Gatun Lake. Data from Argus indicates that the current water level in Gatun Lake has fallen below the historical average recorded between 1965 and 2022. Forecasts suggest it will continue to decline in the coming months.
Ross Griffith, Head of Americas Freight Pricing at Argus, stated bluntly: "The problem now is that the water level is dropping continuously, and this shouldn't be happening from May to December."
Lower Water Levels Force Canal to Limit Cargo
A direct consequence of falling water levels is that the Canal Authority is forced to restrict the maximum draft, or depth, of ships. Draft, simply put, is the depth of a ship below the waterline. By limiting draft, ships must carry less cargo to pass safely, which naturally drives up shipping costs per unit.
Over the past month, the Panama Canal Authority has implemented three consecutive draft restrictions for the Panamax locks. By September 3, the operational water level for ships will be reduced from the normal 50 feet to 47.5 feet.
Meanwhile, the number of vessels waiting to transit is rapidly accumulating. On August 3, there were 113 ships waiting to cross, a sharp increase from just 40 on January 2.
Larger Ships Face Higher Fees, with Single Auction Bids Nearing $4 Million
The canal's locks are divided into two types: Neopanamax (for larger vessels) and Panamax (for medium-sized vessels).
According to Argus data, the average auction price for the Neopanamax locks in recent weeks has reached $2.5 million, setting a new all-time record for both lock types. Regarding the highest single auction bids since July 28, the records for Neopanamax and Panamax locks have reached $3.78 million and $2.63 million, respectively.
It is important to note that large container ships and liquefied petroleum gas companies, which are frequent users of the canal, typically book fixed-price slots in advance. These prices are far lower than the auction averages. However, approximately 30% of canal transits secure slots through daily auctions, and this segment is directly bearing the brunt of the price surge.
Canal Authority Calls It Market Fluctuation, Not a Price Hike
In response to public scrutiny, the Panama Canal Authority stated that some recent transit vessels paying over $1 million in auctions reflects "temporary market volatility," not the official toll rates set by the authority. A spokesperson also emphasized that the announced draft adjustments will not reduce the daily number of ship transits. However, the spokesperson added that the authority may tighten restrictions further depending on how conditions evolve.
Nevertheless, analysts hold a more pessimistic view. Ross Griffith warned: "It is possible that a worse situation than 2023 could develop." Last year was already the driest in recent years, but this year the water level is dropping at a steeper rate, and the dry season, which typically begins in December, has not yet arrived.
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