Labor Shortages and Oil Prices

With oil prices as high as they are, one would think that national and international oil companies would be ramping up production at a breakneck pace to take advantage of the situation. That, in turn, would ease prices. But a number of factors are keeping this from happening, and that could keep prices high and hasten the adoption of alternatives such as biofuels and cars that run on electricity, according to Daniel Yergin, a respected analyst and chairman at Cambridge Energy Research Associates. Writing yesterday in the Financial Times, he said, "Oil is in the process of losing its almost total domination in ground transport."

Biofuels companies and peddlers of electric vehicles have been saying this for years. But they were wrong in the 1980s, during a previous run of high oil prices. Today we're still as dependent on oil as we ever were--if not more so. But there are signs that things will be different this time.

For one thing, national oil companies are taking over production, and doing a bad job of it, which is leading to declining oil production in many oil fields. What's more, Yergin says that the oil industry is ill equipped to ramp up production. For one thing, it's facing a shortage of qualified workers. Yergin points out that after oil prices collapsed in 1986 and in 1998, there were cutbacks resulting in a "missing generation in the oil industry." Larry Schwartz, a researcher at Sclumberger who I recently talked to, said the same thing: it's going to be hard for oil companies to hold on to experienced researchers like him. Financial incentives won't work. "I'm rich," he says. "I'm only doing this because I enjoy it."

Schwartz thinks that the labor shortage is the biggest challenge the industry faces. And Yergin writes that the shortage of good people has already driven up costs and delayed projects. There are other factors driving up prices as well, and those have caused costs for developing new oil fields to double in the past four years, Yergin writes. So while there's still a lot of oil in the ground, it's just not easy to get to it quickly.

That's good news for alternatives to the gas-powered cars. If oil prices stay high because supply can't ramp up quickly, that will give cellulosic ethanol companies and makers of hybrids and electric vehicles a window of opportunity. They may be able to bring down costs so that they can compete even when oil prices drop, as they likely will eventually. It looks as though biofuels, for all their problems, and hybrids are here to stay.