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Use of the Panama Canal
Strategically located between the Atlantic and the Pacific Oceans, the Panama Canal offers a cheaper, efficient, and safer route for maritime transport across the Atlantic and Pacific oceans. Panama Canal poses significant advantages to international maritime transport, especially between North American and South American countries. Before its development, sea merchants from North America’s East Coast used to travel around South America to reach America’s west coast. They equally had to sail through dangerous waters to reach their destination. Such risks meant that international maritime transport was expensive and time-consuming. However, with the development of the Panama Canal in 1914, the length of time needed to sail across the Atlantic and Pacific oceans reduced by half (Haskin 2012). Similarly, the risks posed by sailing through dangerous transport routes disappeared.
Now, the Panama Canal is a key transport route for international traders who operate between South America and North America. Several types of cargo pass through the Panama Canal yearly. Most of this cargo includes foodstuff, fuel, and building materials (among other products). Across both ends of the Panama Canal transit route, 2009 estimates showed traders shipping 116,283 tons of cargo from destinations along the Atlantic Ocean to other destinations along the Pacific Ocean (Knudson 2012, p. 3). Conversely, traders transported about 81,713 tons of cargo from destinations along the Pacific Ocean to destinations along the Atlantic Ocean (Knudson 2012, p. 3). The use of the Panama Canal as a key transport route in international maritime travel cannot be underestimated because the Panama Canal Authority claims that sea traffic through the canal accounts for about 5% of all international maritime travels (Currie 2012, p. 400).
Ownership of the Panama Canal rotated among the French, United States, and the Panama government. However, since the Panama government gained control of the Island in 1999, the government has used the canal as a major revenue source. Panama’s president once said that he intended to use revenue from the canal to transition his country to a first-world country (DIANE 2012). Analysts estimate operations from the Panama Canal generates more than $650 million annually (Gros 2004, p. 322). The Panama government charges every ship about $35,000. Observers say that this figure may even double or quadruple in the future as the volume of international trade increases (Gros 2004). Since the Panama government secures all the revenues collected from the Panama Canal, the canal is a key revenue generation source as well.
Impact of Canal Expansion on the Size of Vessels Using the Canal
The Panama Canal Authority estimates that the expansion of the Panama Canal will bring a new set of locks to increase the facility’s operation capacity by almost double. In detail, the expansion of the canal allows for the passage of more and bigger ships. The largest ship to pass through the canal was about 973 feet (Hoffman 2009). The initial design of the Panama Canal hosted large ships such as the Panamax), but modern technology has seen the construction of newer and bigger ships that carry more cargo. Unfortunately, because of the outdated design of the Panama Canal, these modern ships cannot pass through the canal. Therefore, critics say Panama Canal’s initial design is outdated because today’s design of ships is not the same as they were in the early 1900s (Hoffman 2009). Big shipping companies (operating big ships) have also complained that they have to wait for several hours at the canal because they have to offload some of their cargo to smaller ships to pass through the canal.
Traders who have lost faith in the canal have incurred extra costs of seeking the services of round-the-world services to circumnavigate the challenges experienced at the Panama Canal (DIANE 2012, p. 19). This extra service has increased the cost of shipment for companies operating large ships. Moreover, customers have to compensate such companies for their trouble. Coupled with the delays experienced at the Panama Canal, using alternative routes to avoid Panama Canal has drastically increased the cost of freight around maritime routes bordering South America and North America. Therefore, modern ship designs have made it more difficult for the Panama Canal to operate efficiently. From this trend, there are increased fears that the Panama Canal may become obsolete. However, since the canal is a key revenue-generating facility for Panama, the Panama government and its citizens decided to modernize the canals to accommodate larger vessels, and cope with its increased traffic of ships. This conviction by the Panama government materialized through a referendum, where more than 70% of Panama citizens voted for the modernization of the canal (DIANE 2012). Moreover, the presence of competition from other countries (intending to invest in the construction of alternative sea routes) intensified the reasons for the Panama government to improve the canal’s efficiency.
Part of the canal’s expansion includes the construction of two more lock complexes at the entry and exit of the canal. The locks normally determine the size of the ship that can pass through the canal. Initial design features of the canal had a restrictive size on the type of ships that could pass through the canal. Considering the infrastructural setups of the canal, expanding the old lock size to meet the new specifications would be a tedious and expensive undertaking. Therefore, contractors had to design the new locks on a different canal. Its implication is therefore going to be the accommodation of large ships (Fleming 2000).
Besides the passage of larger ships, the expansion of the Panama Canal will also decrease vessel congestion. Indeed, the aging infrastructure of the Panama Canal has created congestion problems because it has been difficult for the canal to cope with the ever-increasing vessel traffic (DIANE 2012, p. 19). Therefore, many ships have experienced substantial delays from vessel congestion. Alternatively, some merchants have decided to load their ships with more goods and chosen an alternative route (to the Panama Canal) to avoid the massive delays witnessed at the canal.
A typical Panama ship has a deadweight tonnage, which stretches to a maximum of 80,000 tonnes (Fleming 2000). However, the maximum weight allowed for its cargo is 52,500 tonnes. The initial locks of the Panama Canal were 28.5 meters wide, but on the request of the U.S Navy to allow larger vessels to pass through the canal; contractors increased the length of the locks to 36 meters (DIANE 2012). This expansion happened to accommodate large U.S Naval ships. The size of every lock and the height of its canal normally determine the size of the ship that can pass through the canal.
The planned expansion of each lock introduces deeper and wider channels for ships to pass through. Ships that will use the expanded channels will be 25% longer, 51% larger in the beam, and 26% bigger in the draft, to define a new set of the matrix that will increase Panama’s capacity to accommodate modern vessels (Fleming 2000).
Through the above expansion, vessels will enjoy more time efficiency. The increased time efficiency stems from the additional features that the new water channel will have. For example, the newly constructed channel involves the use of tugboats (instead of locomotives) to position the ships along the canal (Fleming 2000). The use of locomotives has been the traditional method used to position vessels. Indeed, compared to tugboats, locomotives are less precise in positioning ships along their canals. Vessels will therefore take less time to pass through the canals because there will be a more efficient technology for aiding this journey. Besides the use of tugboats, vessels will also experience more efficiency, while passing through the new canals since rolling gates will act as additional facilities for the new locks (traditionally, contractors used miter gates. Compared to rolling gates, miter gates are less efficient and more time-consuming for easing the movement of ships through the canals).
Impact of Rising Oil Prices and Use of Low-Sulphur Diesel
The effects of surging global oil prices have not only affected the maritime industry because other transport industries that rely on fossil fuel have felt the impact of the rise in global oil prices as well (Dimitrova 2010). Based on environmental fears, the International Maritime Organisation and the European Union introduced new stringent measures regarding the use of fossil fuel in maritime transport. They have stated that the maritime transport industry should use low-sulfur diesel because of its good environmental record. The use of low-sulfur diesel increases the cost of oil because it is expensive.
The surging prices of oil and the use of low-sulfur diesel both imply that the cost of oil continues to rise. The maritime industry greatly depends on oil to power vessels. Within the last five years, the transport maritime industry has witnessed a significant rise of between five to eight times its energy costs (Transportation Economics & Management Systems 2008). The last decade has seen the price of crude oil rise from about $20 to about $140 a barrel. In the year 2000, experts projected that fuel costs only accounted for about 20% of the total operational costs in the transport sector (Transportation Economics & Management Systems 2008). However, when the fuel cost increased to about $140 a barrel, this cost accounted for about 50% of the total operational costs of the maritime industry. Since 2002, the cost of oil has almost doubled. Considering the rapid increase in the cost of oil prices, experts fear that the price of crude oil may rise to about $200 a barrel (Transportation Economics & Management Systems 2008). Such an increase would mean the price of oil would account for 70% of the total energy costs in the maritime industry because it would mean a 300% increase in the cost of oil (since 2002). Concisely, if the price of crude oil rises by only one dollar, there will be a 1% rise in the cost of transport (Transportation Economics & Management Systems 2008).
This rapid rise in the price of crude oil has caused a lot of instability in the maritime sector because experts say it may lead to some significant changes in the pattern of distribution for goods and services around the world (Bouchentouf 2011). For example, the maritime sector is responsible for the distribution of food and consumer products around the world. With the rapid increase in the price of oil, the price of food and consumer goods (such as electronics and furniture) will suffer significant hikes. Other consumer goods like cars and construction materials will also suffer the same fate because they are still subject to the movements in global oil prices (and its subsequent impact on the maritime sector). From the rapid increases in oil prices and the subsequent rise in the cost of goods and services, experts fear that the world economy may experience significant setbacks in its growth prospects (Transportation Economics & Management Systems 2008). Similarly, consumers and suppliers may have to contend with a shift in the equilibrium of the world economy.
The shift in supplier prices (to pay for extra maritime costs experienced from the rise in oil prices) may characterize the shift in economic equilibrium (Bouchentouf 2011). On the other end of the supply chain, consumers may have to adjust their demand for such goods and services to meet their purchasing power. A perfect example of this realignment (of demand and supply) manifests from the reduced demand for Chinese steel products to the U.S. Since the price of oil started to rise in the year 2000, Chinese steel production has decreased by 20%. However, the U.S steel industry is flourishing because the country’s steel production increased by almost 10% (Transportation Economics & Management Systems 2008). This difference in steel production occurs because Chinese steel manufacturers face extra production costs associated with shipping their products to the U.S, thereby making their products uncompetitive in the U.S market. Therefore, considering there is no change in the increase in oil prices, the cost of doing business in the maritime sector will equally increase. This increase stems from the increase in the cost of production that transporters experience from the rise of oil prices.
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Focusing on the use of low-sulfur diesel to power ships, the long-term impact of such a strategy hinges on a better environmental record for the maritime industry. The use of low-sulfur diesel means that the industry will use cleaner fuel (Spyrou 2010). Low-sulphur diesel is clean fuel because its refinement means it has less sulfur content. Sulfur occurs as a natural part of diesel, and it is the cause of the dark smoke normally witnessed from diesel engines. Moreover, the high sulfur content in diesel engines also stems from the high level of soot in diesel. Soot causes dark fumes from diesel engines, thereby leading to serious environmental pollution (Spyrou 2010). Its refinement, therefore, means that it is 97% cleaner than conventional diesel available in the gas market (Spyrou 2010). The new direction by the International Maritime Organisation and the European Union will therefore ensure that there is improved air quality from maritime transport in the long-term (through decreased exhaust emissions).
In most transport industries, decreased reliance on oil counteracts increased oil prices. The use of alternative sources of energy such as solar and electricity (among other green energy sources) has taken center-stage in curbing increased oil prices. However, it is difficult for the shipping industry to follow the same approach. Indeed, unlike other transport modes such as cars and railways, it is not easy to undertake extensive modifications to adopt alternative sources of energy such as solar, electricity, or biogas fuels to power ships (Transportation Economics & Management Systems 2008). Comparatively, the automobile sector is transforming its product development strategy to develop engines that can use alternative sources of energy such as electricity. The same approach cannot work in the shipping industry because ships carry very huge loads and sail through the wild, without any center for refueling or recharging (as cars). Therefore, the shipping industry is unique in its operations. Alternative strategies for mitigating fuel cost increase therefore need to come from its internal operations. In other words, all the alternative ways for counteracting increased oil costs need to stem from reorganizing the current operational activities of the shipping industry to increase efficiency.
The greatest selling point for water transport has been its low cost. Low-cost transport has been a defining feature of water transport (Transportation Economics & Management Systems 2008). It differentiates it from other modes of transport including road, rail, and air transport. Traditionally, water transport has provided the lowest cost of international transport because of their low line-haul price. So far, this paper shows that the relentless increase in the price of oil threatens the dominance of water transport in international trade. Even though the cost of oil and its subsequent effect on water transport (and other forms of bulk transport) is vital for the sustainability of the maritime industry, its importance is also subject to other price causes. Nonetheless, price is far less important in the movement of container transport because other price variables (like the time for transporting goods across international waters) also influence the competitiveness of the industry.
Since maritime transport is a form of bulk transport, shipping companies usually charge per ton. Even as the global prices of oil continue to increase, shipping companies can devise newer ways of reducing their shipping costs by using larger ships to accommodate more goods. This way, shipping companies will be able to exploit economies of scale associated with using larger vessels. Conversely, they will be able to charge lower shipping costs so that they do not lose their core advantage in international transport – low pricing.
Besides, since time is another crucial advantage for determining shipping costs, shipping companies can equally exploit the opportunities associated with transporting goods (in less time) to charge higher prices that counter the increased pressure of rising oil prices (on their operational costs). Usually, shorter shipping times attract higher shipping costs, while longer shipping times attract lower shipping costs. Shipping companies may exploit the opportunities existing from using faster vessels to charge a premium for their services. Shipping companies may use this costing model to mitigate the effects of rising oil prices on the shipping industry. Therefore, as the company experiences a rising wage bill (from increased oil prices), it may recover some of this lost revenue through improved efficiency. Therefore, shipping companies do not have to transfer increased operational costs to their customers through increased shipping costs. The above alternative methods for maintaining shipping costs ensure that shipping costs remain low. Through such pricing alternatives, shipping will remain a cheaper mode of transport, thereby retaining its attractiveness as the main mode of transport in international trade.
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