The Panama Canal Authority announced in June that it will raise daily booking slots to 35 from August, after higher rainfall at Gatún Lake allowed it to ease restrictions that had constrained shipping since 2023. Neopanamax crossings through the larger locks will also increase. For a waterway that at its worst was handling barely two-thirds of its normal traffic, it is a welcome recovery.
It would be a mistake to treat the episode as closed. The 2023 drought showed how much one of the world's key energy trade routes depends on rainfall in a single watershed, and it changed shipping behaviour in ways that will outlast the water shortage. The trade most affected was not crude oil or LNG but liquefied petroleum gas and ethane, and the main exporter affected was the United States.
How the restrictions unfolded
Gatún Lake supplies the fresh water that operates the canal's locks. In 2023, its water levels fell to the lowest since record-keeping began in 1965. With each transit using a large volume of lake water, the canal authority began rationing slots.
The numbers tell the story. Normal operations offer 34 to 36 crossings a day. At the end of July 2023, only 32 daily booking slots were available. On 7 November the authority cut traffic to 24 crossings a day. Reservations fell further to 22 a day in December and 20 in January 2024, and a reduction to 18 was planned for February before improved water levels allowed the authority to relax the schedule.
Slot scarcity created a market. Some reserved slots are auctioned, mainly to very large gas carriers, with a base rate of $100,000 for short-term spot cargoes. During the worst of the drought, winning bids reached far higher levels as shippers competed for passage.
Why LPG took the hit
The canal matters most for US exports of LPG and ethane. Together they account for 63 per cent of US petroleum product exports that cross the Panama Canal, mostly bound for East Asia. US Gulf Coast LPG reaches Japan, South Korea and China fastest via Panama.
When slots became scarce, these cargoes were among the first to divert. In November and December 2023, US LPG flows through the canal were 23 per cent lower than the January to October 2023 average, and ethane flows were 73 per cent lower. Tankers instead sailed east, through the Suez Canal or around the Cape of Good Hope. Monthly US LPG volumes through Suez reached 374,000 barrels a day in November and 179,000 barrels a day in December. LPG flows through the Bab el-Mandeb Strait, the southern gate of the Red Sea, rose 59 per cent in 2023 compared with 2022.
Two chokepoints at once
The timing could hardly have been worse. Just as Panama restrictions were pushing US gas carriers toward Suez, attacks on shipping in the Red Sea from November 2023 began pushing vessels away from Suez. Major oil and gas companies started avoiding the Bab el-Mandeb, and tankers rerouted around southern Africa. Crude flows through the strait in December were 18 per cent below their January to November average. Tanker rates for routes crossing the Red Sea rose an average of 20 per cent in December, reflecting higher war risk insurance.
For an LPG cargo leaving Houston for Japan in December 2023, the choice was between a scarce and expensive slot at Panama, a risky passage through the Red Sea, or a much longer voyage around the Cape. Each option added cost. That combination is the clearest example in recent years of how two unrelated disruptions on opposite sides of the world can compound each other.
Who paid
The cost of the disruption did not fall evenly. Exporters with term charters on large carriers absorbed longer voyages and higher fuel bills. Spot sellers faced the auction premium or a detour. Asian buyers paid more for delivered cargoes, and some turned to suppliers in the Middle East for nearer cargoes. Freight markets for gas carriers tightened worldwide, because every ship sailing the long way round was unavailable for its next cargo for longer. A water shortage in Panama thus raised shipping costs on routes that never go near the canal.
Climate risk in an engineering asset
The Panama Canal's vulnerability is structural. The lock system relies on fresh water released from Gatún Lake with every transit, and the lake depends on rainfall in the surrounding watershed. A severe dry season, such as the one associated with the 2023 El Niño, reduces lake levels for months.
The canal authority has proposed long-term water projects, including a new reservoir on the Río Indio, to secure supply. Those projects take years and face local opposition. In the meantime, the canal's capacity in a given year depends partly on weather, which shippers and exporters must now treat as a planning variable.
What changes for US exporters
The recovery in slots helps, but US exporters of LPG and ethane have learned a lesson. Long-term contracts with Asian buyers often price in a particular voyage length and freight cost. When the canal is constrained, those assumptions fail. Exporters and buyers are likely to build more flexibility into future contracts, including clauses that share the cost of longer voyages and options to deliver to alternative destinations.
There is also an infrastructure response. US exporters can use larger vessels that do not rely on Panama at all, accepting longer voyages via the Cape in exchange for scale. And buyers in Asia may diversify LPG supply toward the Middle East, which is closer and does not depend on Panama, though it faces its own chokepoint risk at Hormuz.
The broader point
Energy security discussions tend to focus on the Strait of Hormuz and on pipelines from Russia. The Panama drought shows that chokepoints can fail for reasons that have nothing to do with conflict. A waterway that moves a significant share of US gas liquids to Asia was effectively rationed for months because of a dry year.
As climate variability increases, the probability of another such episode rises. The canal will reopen fully in August. Traders and planners would be wise to treat 2023 as a rehearsal rather than an anomaly, and to price the option of an alternative route into contracts before the next dry season rather than during it.