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Panama Canal reduces traffic by more than a 3rd because of severe drought conditions

STEVE INSKEEP, HOST:

Two giant canals carry an enormous amount of global shipping, and both of those routes are now at some risk. Attacks from a group in Yemen have disrupted traffic to and from the Suez Canal. We've reported on that a lot. Now let's focus on the other because drought has slowed down traffic through the Panama Canal. Robert Handfield is a professor of operations and supply chain management at North Carolina State University. He's following this. Good morning, sir.

ROBERT HANDFIELD: Good morning. How are you?

INSKEEP: You know, I got to study the Panama Canal in elementary school. I love this topic, but not everybody has, I guess. So how does a drought - how could it affect a canal?

HANDFIELD: Well, most people don't realize this, but the Panama Canal is actually fed by some large lakes that are in Panama. It's not seawater. It's freshwater that allows the ships to go through. And it takes about 200 million gallons of water per ship to get one ship through the canal. Unfortunately, this year, Panama has had a significant drought, and those lakes also feed more than 50% of the country of 4 million people for water as well. So with this drought, the number of ships going through is less, and there's also a severe water drought for the rest of the country as well.

INSKEEP: You know, I just picture Panama - I mean, it's Central America. I picture it as just very, very lush and green. These lakes - are the level of the lakes actually dropping?

HANDFIELD: They have dropped significantly. One of the reasons why is this El Nino has come through. And it could also be climate change. And so various - for various reasons, the level of water in the lakes has dropped significantly, and this has impacted the throughput of the ships through the canal as well.

INSKEEP: OK, so they've got to keep the locks closed, the gates closed to conserve water. This has reduced traffic by one-third. How big a deal is that?

HANDFIELD: That's a very big deal. As you know, there are really just two large canals that impact - really act as bottlenecks to global shipping, and that's the Suez Canal and the Panama Canal. So when one of them has a 36% drop in capacity, from roughly 38 per day down to 24 ships per day, you get a backup. You get ships that have to wait. It has also even led to some interesting things where there's now an auction, and people are competing to jump the line. You can pay as much as 400,000 to $2 million to jump the line and go to the front.

INSKEEP: Wow. We've just got a few seconds here, but is it possible that slowing down shipping in this way could actually cause inflation and shortages in places like the United States?

HANDFIELD: It's unlikely that it's going to impact the United States. It is definitely going to impact Europe. You know, we have ports on both sides of the - both oceans on the East Coast and the West Coast. Shipping costs in general are probably 1%, 1 1/2% of total cost for the products that we buy, so it's unlikely it's going to impact inflation. It could cause some delays on things like car parts or other things. We're also seeing an increase in the price of oil as well.

INSKEEP: Robert Handfield of NC State University, thanks for the insights. I really appreciate it.

HANDFIELD: My pleasure. Thank you, Steve.

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