• There are 154 commercial vessels waiting to cross the Panama Canal, with an average wait time of 21 days.
• Panama Canal Authority has reduced the number of ships allowed to pre-book transit through the Panamax locks, and restrictions due to ongoing drought conditions will remain in effect until August 21.
• 40% of all U.S. container traffic travels through the Panama Canal every year.
• "This is going to get worse before it gets better," said one marine shipping expert.

The number of vessels waiting to cross the Panama Canal has reached 154, and slots for carriers to book passage are being reduced in an effort to manage congestion caused by ongoing drought conditions that have roiled the major shipping gateway since the spring. The current wait time to cross the canal is now around 21 days.

The Panama Canal is a critical trade link for U.S. shippers heading to Gulf and East Coast ports. The U.S. is the largest user of the Panama Canal, with total U.S. commodity export and import containers representing about 73% of Panama Canal traffic. Forty percent of all U.S. container traffic travels through the canal every year, about $270 billion in cargo.

The massive pileup is a result of water conservation measures the Panama Canal Authority deployed in late July due to drought. The PCA has temporarily lowered the availability of booking slots from August 8-August 21 for Panamax vessels, which are the largest vessels that can cross the canal. These vessels can carry 4,500 twenty-foot equivalent units (TEUs), which are the dimensions of a container. The number of pre-booking slots was reduced to 14 daily from 23.

Satellite photos from Planet Labs detail the congestion.

This latest reduction in bookings is on the heels of the PCA reducing the number of vessels allowed to go through the canal in a day. Starting on July 30, 2023, the daily transit capacity of the Panama Canal was adjusted to an average of 32 vessels per day (10 vessels in the newer Neopanamax locks, which serve the larger vessels, and 22 vessels in the older Panamax locks). Before the water conservation measures, transits were 34 to 36 a day.

When the daily capacity is reduced, ships lacking reservations are compelled to wait in line. The Panama Canal Authority tells CNBC 38% of ships waiting have reservations. The remaining 62% of ships do not, which means they have to wait for the vessels with reservations to proceed across the canal.

A temporary measure was put in place where five ships a day on the Panamax locks can traverse the canal on a first come first served basis. The measure is designed to help reduce waiting times but backlog remains.

The PCA told CNBC that the last time a backlog of vessels like the current situation was in 2022, when the world of shipping was impacted by residual delays from the pandemic and the conflict between Ukraine and Russia.

Additional lower water level restrictions imposed by the PCA in July also require vessels to be 40% lighter, impacting vessels that were in transit when the requirements were implemented. The Ever Max was forced to unload 1,400 TEUs at the Port of Balboa in order to meet the requirements and gain passage. The vessel is currently anchored at the Port of Savannah.

"Those containers left may need another vessel to complete the journey," said Captain Adil Ashiq, head of North America for MarineTraffic. "This is going to get worse before it gets better," he said.

A canal lock uses 50 million gallons of water when a single vessel traverses the canal. Water levels in Gatun Lake, which feeds the canal, are at a four-year low.

Ricaurte Vásquez Morales, administrator of the Panama Canal, said that considering the changing circumstances, the canal is maintaining an open line of communication to keep customers informed about booking slot availability. "Through regular updates, transparent dialogue, and close collaboration with shipping lines and stakeholders, we strive to manage expectations and provide real-time information that enables our customers to make informed decisions," he said.

Ashiq explained that vessels have to wait longer to transit the canal or ocean carriers make a business decision to take alternative routes, which add time and fuel costs to the journey. Shippers using multiple vessels to move their freight adds to freight costs, and longer lead times to secure bookings. Ultimately, he said, these costs may end up being passed down to businesses and consumers.

Recent data released by supply chain intelligence firm Descartes shows the East Coast ports continue to be the preference for U.S. shippers. The top five West Coast ports showed a decrease of 4.1% in July, and the top East and Gulf Coast ports processed an increase of 4.1% during the same timeframe.

"Now is not the time to further stress supply chains that are still straining under ongoing logistical pressures," said Stephen Lamar, president and CEO of the American Apparel & Footwear Association. He said surcharges and vessel restrictions will likely mean higher clothing and shoe prices for U.S. consumers this holiday season.

Alan Baer, CEO of logistics company OL USA, told CNBC that shippers may have to start looking at other routes.

"With the increasing difficulty of reaching the U.S. East Coast via the Panama Canal, importers may be looking at vessels transiting the Suez," Baer said. He added that this can be an effective solution for freight originating in the ASEAN region and some Southern China origins. However, for Northern China and North Asia, deviation via the Suez can add seven to 14 days of additional transit time.

Energy sector diversions are already happening

Diversions are already happening in the energy sector. The mounting delays have clean tankers, which carry refined petroleum products, avoiding the canal, shifting their preference to book routes to the Atlantic Basin, according to S&P Global. Data from its Commodities at Sea unit shows that in the combined June to July period, U.S. Gulf Coast clean petroleum product exports using the canal and traveling to the West Coast of South America slowed by 82% year over year. Exports in July, specifically, were down 12% year over year.

Cheniere Energy announced in July that it would avoid the Panama Canal to ship LNG because of the wait times. The canal is the quickest route for the LNG market to reach Asia. Coal traffic is also being impacted and making adjustments. India is a big importer of U.S. coal and vessels carrying the commodity also use the Panama Canal.

Correction: This story has been updated to reflect the correct volume in traffic for the top five West Coast ports and the top East and Gulf Coast ports during the same time frame.