Panama Canal

Low Oil Prices Threaten Panama Canal

The Panama Canal expansion project is complete after nine years. It is opening for traffic on June 26. The canal added a third lane that can accommodate larger ships (those that carry 14,000 containers as opposed to 5,000 containers) – although not the largest currently in use. This new lane is expected to double the canal’s cargo capacity. Unfortunately, current conditions in the oil market have made the Panama Canal a less attractive route for international shipping than when construction began. Currently low natural gas and oil prices will make it difficult for the Panama Canal to recoup the cost of this major investment.

LNG Market

Liquefied Natural Gas (LNG) was supposed to provide a major boost to Panama Canal traffic over the next four years. Energy producers like Cheniere Energy (which recently completed construction of its Sabine Pass natural gas liquefaction terminal along the Gulf of Mexico) eagerly awaited the completion of the Panama Canal expansion project. Sabine Pass is currently the only major liquefaction terminal in the United States with permission to export LNG from the United States to Asia and the Panama Canal’s expanded capacity will significantly reduce the time it takes ships leaving the Gulf of Mexico with American LNG to reach Asia. Other LNG export terminals along the Gulf Coast of the United States are still under construction and will be for some time, if they are ever completed.

LNG Demand

Expectations based on LNG demand also need to be revised downward in the wake of lower oil prices. In 2015, a variety of factors contributed to a decline in Asian demand for natural gas. Mild temperatures and a pivot towards coal use dampened demand from major buyer South Korea, and Japan reportedly has such a surplus of imported fuel that it is preparing to sell its excess product. This downward trend is expected to continue but European demand for natural gas is expected to grow. U.S. companies are aggressively seeking to cut into Gazprom’s market share in Europe. This is good news for LNG export terminals along the eastern seaboard but not for the Panama Canal, which hoped LNG trade to Asia would help pay off the costs of its expansion project.

Transportation Costs

The extended decline in oil prices has not been kind to the Panama or Suez Canals. As the cost of fuel decreased, ships more often decided to circumnavigate continents rather than pay their fees. Most return from Asia carrying lighter and less valuable cargoes that incur significantly lower fuel costs. Many chose to make the longer trips because fees can be up to $300,000 for the Panama Canal and up to $1 million for the Suez Canal. In fact, Egypt recently reduced fees for some ships travelling through the Suez Canal to encourage more traffic. Given current conditions, the Panama Canal may find that it needs to market itself more aggressively and reduce fees to encourage new customers accustomed to taking different routes to Asia.

The Future of the Panama Canal?

Despite the current problems, the future does look brighter for the Panama Canal. In a few years the global oil glut will have eased significantly and fuel costs will increase from current lows. Higher fuel costs will ultimately make the larger Panama Canal a more attractive route to international shipping – just not in the short term.