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As the cost of oil goes up and up so does the cost of shipping. This fact has benefited the Panama Canal Authority. The present expansion of the Panama Canal is premised on the need for not only larger locks but more capacity for shipping. At the same time manufacturers are rethinking where they put their factories. Will a factory in Mexico need the Panama Canal to ship to the USA?

The most often quoted figure is that 5 percent of world trade passes through the Panama Canal. The tonnage passing through the Panama Canal is expected to double when the current Panama Canal Expansion Project is completed. However, will Panama complete its expansion program just in time to see a readjustment of world trade? Will the cost of fuel trump low labor costs in Asia. If this happens will less world trade pass through Panama? Will new factories in Mexico and throughout Central America need the Panama Canal?

The August 15-17 International Edition of USA Today, available in Panama as a Sunday insert in La Estrella, ran an article entitled, "Transport costs could snap world's supply chain." The article reports current speculation that steadily rising fuel costs will outweigh cheap labor in Asia. Thus USA and European companies have been looking to Mexico for the USA and Eastern Europe and Turkey for Europe for possible new factories.

The figure bandied about for oil is $200 a barrel. The cost of moving a shipping 40 foot shipping container from China to the US West Coast has gone to $8,000 from $3,000 when oil was $20 a barrel. Estimates are that oil at $200 a barrel will drive the cost of the moving the same container to $15,000.

The Panama Canal's percentage of world trade is expected to increase based upon the lower cost of canal transit versus a trip around Cape Horn at the tip of South America. However, transportation cost through the Panama Canal may not be an issue if North American companies put their factories in Mexico and ship by rail to their US and Canadian markets.

Then again, not all world trade through Panama is from Asia to the USA. The Colon Free Zone prospers because of its proximity to the Panama Canal, its duty free status and its position as a supplier to much of Latin America. Transportation costs using Panama are less of an issue when an efficient setup like the Colon Free Zone has dedicated customers, without other realistic supply choices, throughout Latin America.

Panama's economic expansion is partially based upon the amount of world trade passing through Panama and the attendant transportation cost savings. Since not all world trade moves north from Panama there will always be markets in next door Colombia and the northern countries of South America. With the improvement of infrastructure on ports throughout Central America the bets are that world trade will continue to pass through Panama and in increasing amounts. Transportation costs through Panama may go up but like most inflationary effects they pass through the economy. They do not shut it down.

For thoughts on the effects of high oil prices, world trade through Panama, and their effects on investment and property values in Panama feel free to contact us at ABPanama. We have over 23 years experience managing real estate portfolios and work throughout Panama.