Nov 04 2007
Quit cutting chemistry class!
Published by Jason Welker at 8:35 pm under
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WikipediaOil worker shortage could lead to supply squeeze - Nov. 2, 2007
Lately I’ve blogged about the impact of higher oil prices on the petrol market in China (here and here). As the main input in petroleum products such as gasoline and diesel, the price of oil affects the costs of fuel producers, such as China’’s SinoPec and PetroChina, the two large state-owned petroleum companies, as well as the scores of smaller competitors in that provide fuel to China’s thirsty economic machine.
As the price of oil has approached $100 per barrel, fuel manufacturers have had to cut back output as their costs have soared, putting upward pressure on the market price of fuel here in China. But what determines the price of a barrel of oil? Is the increase in the price of oil due to an outward shift of demand or an inward shift of supply? Actually, it’s probably both. This article helps answer part of our question, and it does so by discussing one of the determinants of supply of oil, resource costs.
What are the resources involved in producing oil? No, oil is not one of them; oil is the output. The main resources needed to extract oil are capital (rigs and drills to extract it, ships and pipelines to transport it) and labor (engineers to design the rigs and drills, roughnecks to work the rigs, and perhaps most importantly, highly skilled scientists):
Over a quarter of the industry’s highly skilled employees - petroleum engineers, process engineers, geologists, geophysicists and the like - are eligible for retirement in two years, said Beyer.
“It’s a real issue,” said Beyer. “Success in attracting new people into the work force is limited.”
Worldwide, the industry’s “people deficit” is expected to reach up to 15 percent by 2010, according to Pritesh Patel, an associate director at Cambridge Energy Research Associates.
A shortage of skilled labor has lead to rising wages and costs for oil companies. Rising costs mean slowdown in production:
“This could cause some delay in supply reaching markets,” he said.
And as anyone who’s followed oil markets over the last four years knows, supply concerns factor first and foremost in the minds of traders, who have bid prices to record highs of over $96 a barrel in recent weeks.
Competition in the labor market has driven up wages for college graduates with degrees in the needed fields.
The industry is trying to fix the problem.
For starters, salaries are fairly high. Patel said a petroleum engineer typically earns $70,000 to $90,000 a year, right out of school.
Labor markets work a lot like product markets, except in a labor market firms are the demanders, and households the suppliers. Like a product market, supply is upwards sloping, meaning that as the price of labor (wages) increases in the market for petroleum scientits, the quantity supplied should also increase, as households respond by “producing” more scientists (i.e. more people will study chemistry and so on, entering the labor market ready to go to work for oil companies).
The obvious solution to the problem of fewer and fewer qualified scientists is the continued increase in wages for such experts. The computer programming industry is experiencing a similar shortage of skilled workers, which has led not only to higher starting wages, but to firms like Microsoft attempting to make software design cooler and more attractive to college students (remember the pet robots?).
Perhaps the oil companies should think about a scheme to distribute to chemical engineering students “‘pet’-roleum molecules” (a pet molecule you can manipulate throughout college into new and exciting chemical products to make the oil industry more lucrative!) to try and make the science more fun and interesting… Then again, perhaps not. Rising wages should solve the shortage of scientists over time, as more and more college students are drawn to the prospect of making $90,000 right out of college!
So, have YOU been skipping chemistry class? Are your parents dead set on you studying business in college? If so, you may want to show them this article and watch the dollar signs glitter in their eyes! Then again, if you care about the negative externalities of the fossil fuel industry, perhaps you should put your science skills towards the development of new, clean, alternatives to oil!
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About the author: Jason Welker is a teacher at Zurich International School in Switzerland, where he teaches Advanced Placement and International Baccalaureate Economics. Jason was an international school student in Malaysia before studying economics at Seattle University then earning his Masters in Education. He calls Seattle and Northern Idaho home. In addition to maintaining an economics wiki and this blog for economics student and educators, Jason also gives presentations on using Web 2.0 tools in education at workshops and conferences around the world. His economics wiki won the 2007 "Best Educational Wiki" award from the "EduBlog Awards". 
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I believe our supply curve for oil, in absolute terms, is shifting outwards with oil demand rather than inwards (though in relative comparison to each other the supply curve is indeed shifting inwards).
The figure in the link provided below indicates currently and forecasts further an outward increase in supply, but demand is simply rising about twice as fast, resulting in higher prices.
True, recent shortages in human resources are increasingly chronic, but its influence in overall price per barrel of oil likewise remains largely ineffectual, these boastive near-100k salaries overshadowed by the tripling in oil discovery and development costs (mostly due to the high price of capital goods)
Still, being an oil engineer in the next few years sounds pretty awesomebut then we might have to live on an oil rig X.X
OUTWARD SUPPLY INCREASE: http://www.eia.doe.gov/pub/oil_gas/petroleum/feature_articles/2004/worldoilsupply/oilsupply04.html
ETC:
http://www.iht.com/articles/2007/10/08/business/polar.php
Well, supply and demand. If the demand for experts in the petroleum field is high but the supply of graduates in the field is low, then wow their wages sure will be sky high. However, despite wages, the problem is that engineering just isn’t a “hot” field at this point in time. The trends seem to be lying with business and economics. So, which will prevail? Old fashioned thinking that business will lead to prosperity rather than working for others, or the lull of a high pay and comfortable working situation?
Just for this article’s purpose, with nothing personal against chemistry, those who hate chemistry right now shouldn’t stop cutting just for what the article said. This is because due to the increase in wages for petroleum engineers, in a few years the high wages would attract more people into the chemistry area (thus increasing the “supply” of this type of labor). This would in turn cause the wages to fall back to where they began. So for those who start studying chemistry expecting a high-paying job in the petroleum industry, chances are that the wages would have fallen by the time they graduate from college.
Hopefully people will become more environmentally conscious and start replacing oil with alternative energies. Economically, this may be possible because even though the oil industry can provide lucrative jobs for engineers, the oil industry is limited by a quickly drying pool of oil as well as increasing pressure from governments and environmentalists to clean up their act. This could mean a decreased demand for oil and an increased demand for alternative energy sources. Luckily from chem. Majors, research in alternative fuels requires the same science degree, so the can still get a job and save the environment. Hence, the moral is: don’t skip chemistry.
In response to Helen’s comment about continuing to skip chemistry class. What if everyone had that thought? “Oh, I’ll continue to skip because others will start to pay attention in class due to an increase in wages”. Then, this labor shortage problem will worsen. So no Helen, skipping chemistry class is not a good idea. If you want a change in the world, don’t expect others to do it. You be the miracle
Whether or not the long-run supply of chemical engineers in the oil industry will remain short, it seems that the wages will continue to be high because the demand for oil will still be at a high because the costs it will continue to rise as it is a scarce resource. Alternatively, studying chemistry may spark an increase in ways to develop an alternative source of energy to replace oil which could continue the demand for chemists, not just in the oil industry.
I don’t know about anyone else but i think this is a good thing. The rising prices of oil could force governments to begin putting more money in alternative fuels, so that nations around the world can stop suckling at the teats of oil-producing countries (well, companies). I agree with Alex Goldman’s comment that the recent price rises would greatly contribute to the demand for alternative energy, and this necessity will certainly lead to innovation.