Remember the Panama Canal?

Reuters

Workers are seen at the construction site of the Panama Canal Expansion project on the outskirts of Colon City January 7, 2014. A Spanish-led consortium expanding the Panama Canal on Tuesday made a counter-proposal to jointly finance work on the project amid a row over costs on one of the world's top trade routes. Building consortium Grupo Unidos por el Canal (GUPC), led by Spanish construction company Sacyr, said it would contribute $100 million to a joint financing plan to keep the project going amid a cost overrun, and asked the canal administrator for a $400 million advance. REUTERS/Carlos Jasso

Article Highlights

  • You would be forgiven if you were unaware that billions of dollars in US business is riding on the Panama Canal expansion.

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  • The canal holds the key to the export of U.S. natural gas – and possibly crude oil -- to markets in Asia.

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  • Because it cannot accommodate large tankers, the Panama Canal is being expanded to about three times its present capacity.

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This year marks the 100th anniversary of the canal’s opening, and you would be forgiven if you were unaware that billions of dollars in U.S. business is riding on its expansion.

Control of the canal was turned over to the Panamanians under a 1979 treaty signed by President Jimmy Carter, and until recently, nobody seemed to care very much about what was going on there.  

Now, however, there is good reason to pay attention. The canal holds the key to the export of U.S. natural gas – and possibly crude oil -- to markets in Asia.  This is a big deal, with a lot at stake for U.S. energy companies.

The point, of course, is that as the export of U.S. energy resources goes, so goes America – only even more so, a point driven home by the latest data showing that the United States is already the world’s biggest producer of natural gas and is expected to surpass Saudi Arabia as the world’s top producer of crude oil by next year.  

Because it cannot accommodate large tankers, the Panama Canal is being expanded to about three times its present capacity. This involves widening and deepening channels along the 50-mile canal route and creating new sets of locks on both the Atlantic and Pacific ends.

The expansion is about three-quarters complete, but the cost of the project has increased from $5.2 billion to more than $7 billion, and construction has fallen behind schedule. An international consortium led by a Spanish construction company is building the new locks, and it says it won’t continue work unless the Panama Canal Authority pays about $1.6 billion in cost overruns. The dispute is now in arbitration.

Currently only about 6 percent of the world’s LNG tankers can pass through the canal.  After the expansion, it will accommodate about 90 percent of the tankers.

Without the canal expansion, LNG tankers from the US would have to pass around the Cape of Horn at the bottom of South America for deliveries to Asia, adding thousands of miles and increased shipping costs to the journey. 

Costs for LNG matter.  U.S. natural gas is cheap when used for domestic purposes, but has to be frozen to a liquid, then piped onto tankers and transported across the ocean to international markets – all of which costs more than the gas itself.

Unless the dispute is resolved soon, America’s gas-export plans might well take a hit. As matters now stand, there is a very real possibility that Japan, India and other Asian countries will look elsewhere for their natural gas supplies – at least in the near term, if LNG tankers carrying natural gas from U.S. ports are forced to take the longer route around the Cape of Horn. 

The dispute over the canal’s expansion is likely a contributing factor in the slow pace of the Department of Energy’s licensing of new LNG export terminals.  All of which suggests that the Obama Administration’s failure to help resolve the dispute could have big negative consequences for U.S. commerce.

There are potentially many big losers if the completion of the canal is delayed, namely U.S. businesses that are counting on export markets to sustain domestic drilling and pay for the construction of LNG terminals and tankers. If the Administration doesn’t move quickly, the consequences would extend to thousands of American families whose jobs are tied to energy production.

Something else: Japan is in urgent need of natural gas supplies. Since the Fukushima nuclear disaster three years ago, Japan has been importing large amounts of energy at high prices and is desperate for U.S. natural gas. 

The Panama Canal’s importance isn’t limited to its role in sustaining world trade.  Without access to natural gas, Japan, India and other energy-consuming countries will need to burn more coal for electricity production, which will increase carbon emissions globally. 

So a lot hinges on the Panama Canal expansion.  America’s interest clearly lies in an expansion of the canal, and we should not sit on the sidelines while the dispute over the project’s cost continues. The Obama Administration should help resolve the dispute. The time for action is now.

Perry is a professor of economics at the Flint campus of the University of Michigan and scholar at the American Enterprise Institute.

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