Suez Canal’s revenues are due to global economic factors like the Ukraine war, energy supply chain shifts, and the Panama Canal drought crisis.
Ali Noureddine
This article was translated from Arabic to English
The Suez Canal Authority reported in January 2023 a considerable rise in the marine navigation corridor’s 2022 revenues, reaching $8 billion and representing a 25 per cent increase compared to 2021. Revenues in 2021 did not exceed $6 billion, while they amounted to around $5.61 billion in 2020 and about $5.8 billion in 2019 prior to the outbreak of the Coronavirus pandemic.
According to the Canal Authority, the Suez Canal’s revenues in 2022 were unprecedented, and can be attributed not only to the rise in ship transit fees but also to the highest level of ship traffic in the canal’s history. More than 23,851 ships transited the canal that year with a total net tonnage exceeding 1.4 billion tons.
These positive developments hold significant importance for the Egyptian economy, given the Suez Canal’s role as a major source of hard currency liquidity, along with remittances from expatriates and gas export revenues. It should be noted that Egypt is currently facing challenges in servicing its accumulated external debts, which by the end of 2022 reached approximately $162.9 billion. Therefore, the Egyptian government greatly relies on the canal’s revenues during this critical stage.
The Suez Canal’s increased revenues are the result of several global economic developments, including the repercussions of the war in Ukraine and subsequent shifts in energy supply chains. Additionally, the drought crisis that affected the Panama Canal contributed to the surge in Suez Canal revenues.
Looking ahead to 2023, the Suez Canal is expected to further benefit from new increases in ship transit fees, in addition to those imposed in 2022. The Canal Authority estimates that these developments will raise revenues to $8.7 billion in 2023.
Repercussions of the Ukraine war and the shifting gas markets
Because of the Ukraine war between March and October 2022, the supply of Russian gas to Europe experienced a significant decline of over 80 per cent compared to its usual annual rates.
By the end of 2022, Russian gas flows to Europe plummeted to less than 7.5 per cent of their previous annual levels. As a result, Europe reduced its reliance on Russian gas within a few months, despite the fact that it had previously accounted for more than 40 per cent of European gas demand.
This abrupt shift resulted in the disruption of well-established supply chains that had been developed over several decades, forming the Russian gas export system to Europe through transnational pipelines, storage facilities and redistribution centers. In September 2022, the detonation of the Nord Stream gas pipelines, which connected Germany and Russia, effectively destroyed any possibility of restoring Russian gas exports to Europe to their previous levels.
In response to this challenge, the European Union turned to liquefied natural gas shipments as the primary alternative to compensate for the absence of Russian gas. These LNG imports, transported by ships, saw a remarkable increase of 63 per cent in 2022 compared to the previous year. This surge signifies a substantial and decisive shift in European energy markets.
Consequently, countries such as Germany, France, Poland, Finland, Estonia, Italy and Greece had to establish new regasification stations to enhance their capacity for converting imported liquefied gas into usable gas at the local level.
Among the prominent countries that emerged as key suppliers to the European market, Qatar ranked second in 2022, with its contribution of LNG supplies to the European Union reaching 16 per cent that year, and transforming into the world’s largest exporter of liquefied natural gas.
These developments have had a significant impact on the Suez Canal, which has emerged as one of the major beneficiaries. The canal experienced a surge in liquefied gas shipments transported by ships from Qatar to European markets, solidifying its importance as a transit point in international energy markets.
Consequently, by June 2022, liquefied gas shipments had climbed to the fourth position among the categories of ships that most frequently transited through the Suez Canal. The heightened importance of the Suez Canal has not only strengthened its role in international energy markets but also enhanced its significance in ensuring energy security for European Union countries.
The impact of sanctions on Russian oil
During this period, European countries implemented a series of sanctions in stages, targeting the Russian oil sector. These sanctions included restrictions on receiving shipments of Russian crude oil in EU countries, followed by measures that prohibited the import of gasoline and diesel produced in Russia.
Prior to these sanctions, Russian crude oil exports had accounted for approximately one-fifth of the oil needs of European countries. Consequently, European importers were compelled to undertake significant restructuring of their oil supply chains in response to the sanctions.
The events that transpired further amplified the importance of the Suez Canal. Since 2022, as a result of the sanctions imposed on Russia, Europe has increasingly relied on oil shipments from Saudi Arabia and the United Arab Emirates, facilitated through the Suez Canal.
For instance, in August 2022, the daily average of Saudi oil shipments to Europe surged to 777,000 barrels, marking the highest level of such exports in over four years. Anticipating Saudi Arabia’s vital role in securing oil for the European market, Standard & Poor’s projects that Europe will become the largest importer of Saudi oil by 2023.
Statistics provided by the Suez Canal Authority unequivocally indicate that the Suez Canal benefited from shifts in the global oil market. In February 2023, the number of oil tankers traversing the canal rose to 660, a substantial increase compared to the 365 recorded during the same period in 2022, signifying a noteworthy growth of 80.8 per cent.
The surge in oil tanker traffic enabled the Canal Authority to raise transit fees for oil tankers in February 2023, in accordance with the remarkable expansion in global trade and the improved economics of shipping, as stated by the authority at the time.
Russian oil exports to India
Due to the imposition of Western sanctions on its oil, Russia was compelled to explore alternative markets for its oil exports. In order to attract buyers, it began offering discounted prices on its crude oil barrels. Capitalizing on this opportunity, India emerged as a major beneficiary by purchasing affordable Russian oil, refining it domestically, and subsequently trading it on global markets or using it for domestic consumption.
Consequently, Russian oil exports to India witnessed a remarkable twenty-two-fold surge in 2022. This substantial increase propelled Russia’s share of India’s oil imports to 25 per cent in 2022 and rose further to 51 per cent in the first quarter of 2023.
It is noteworthy that historically, India had not relied heavily on Russia to fulfill its oil requirements, as the country had leveraged its proximity to the Gulf markets to secure its energy needs. However, the imposition of sanctions on Russia presented India with highly favorable purchasing agreements for Russian oil, allowing India to negotiate from a position of strength. This occurred precisely when Russia required liquidity to finance its conflict in Ukraine.
Moreover, Indian oil refining companies benefited from their activities in UAE markets, as they were able to pay for Russian oil in Emirati dirhams, thus bypassing the need for U.S. dollar transfers that typically involve U.S. correspondent banks.
Once again, the Suez Canal benefited from these agreements, leading to an upsurge in the transit rates of oil tankers passing through the canal. The transportation of Russian oil to India occurs via a maritime route originating from either the Black Sea or the Baltic Sea, traversing the Suez Canal before reaching Indian refineries. The canal further benefited from re-exporting the same refined oil as various derivatives to the West, after undergoing processing in Indian refineries.
Drought in the Panama Canal
The Panama Canal uses two inland freshwater lakes to connect the Atlantic and Pacific oceans. However, the canal administration has been struggling since before the expansion of the canal in 2016. The water levels of the lakes have been decreasing due to low rates of rainfall and drought induced by climate change. Between February and April 2023, precipitation rates dropped to less than half of their normal levels, resulting in record-low water levels in the canal.
Consequently, the canal administration was forced to make emergency decisions to reduce the load of ships passing through the canal, aiming to minimize the submerged part of their hulls.
This crisis has caused a rise in shipping costs through the Panama Canal and has led to delays in the delivery of goods, while also diminishing the overall capacity of the canal. Typically, around 5 per cent of global maritime trade passes through the Panama Canal alone, highlighting the profound impact of these events.
Current analyses suggest that the Panama Canal crisis compelled shipping companies to seek alternative sea transportation routes in order to mitigate shipping costs and minimize delivery delays. Some of these alternative routes pass through the Suez Canal, particularly those connecting South and East Asia with Northern Europe and the eastern shores of North America.
As a result, the Suez Canal has become the primary beneficiary of the Panama Canal drought crisis and its consequential effects on international shipping traffic.
These global developments and transformations have bolstered the significance of the Suez Canal as a crucial maritime route. Consequently, major foreign companies have demonstrated interest in investing in economic activities that complement the canal’s operations in Egypt.
One example of such activities is the establishment of an economic zone spanning 461 km2 along the canal, intended to link the Mediterranean and the Red Sea. Additionally, there are projects related to energy markets, technology, shipping, and infrastructure. While these investments will partially alleviate Egypt’s ongoing financial crisis, they may not be sufficient to fully address it.