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Commentary By Mark P. Mills

The Skills Gap and the Future of Oil

When it comes to the future of work, we’re constantly told that automation and algorithms are destined to eliminate huge swaths of the workforce. But the reality is both more complicated and more optimistic.

A major problem for the U.S. economy is a shortage of skilled workers. A recent Deloitte report estimates that there will be over 2.5 million skilled job openings unfilled in America over the coming decade. Much is being made about the urgency of reviving apprenticeships, job training programs, and vocational education. All of that will help, but the data and demographics (especially an aging skilled workforce), show that all those efforts combined won’t fill the skills gap. This is especially true in the oil and gas sector, which is facing a particularly acute labor shortage across the board from the mechanical, electrical, and construction trades to truck drivers.

The skills shortage is precisely what will force a more rapid adoption of labor-saving digital technologies, especially in oil and gas. In large part it’s desperation, not an infatuation with tech or cost savings, that drives employers to deploy technologies that amplify the capabilities of the employees they have and can find. It is a common misconception to think that automation is always cheaper than using labor. Robot hype aside, the level of digitalization in the industrial sector is still very low, a fact documented by PricewaterhouseCoopers for example. Of course as technology improves, it eventually crosses the threshold where it becomes cheaper than labor. But sometimes the technology is pursued despite higher costs because there is simply not enough labor available.   

And the oil and gas business, with its rising labor challenges, is particularly ripe for change because—as Morgan Stanley and the International Energy Agency (IEA) have observed—it is the least automated industrial sector. As industrial-grade automation matures in both quality and safety, many oil and gas companies have already started to deploy or are planning to adopt some of these new technologies. As these companies increasingly turn to automation, we can expect productivity to rise—which will ultimately create more jobs.

To see how, consider the productivity gains that have already occurred in the oil and gas industry in these very early days of digital automation. Compared to 2010, the United States now produces over twice as much oil with roughly the same number of drilling rigs and the same number of people. That is a productivity record that outperformed America’s semiconductor industry over the same period. Going forward, once robots and artificial intelligence are put to work in the oil fields, we should expect future productivity gains to be equal or even greater.

That means that the marginal cost of producing a barrel of oil in America could drop nearly in half again, as it has over the past decade when it fell from around $70 to the $40 range now. Getting to even lower production costs than today would put America in a position to rival Saudi Arabia’s market-dominating capability. This would shift yet more production to the U.S. It then becomes entirely possible, even likely, that demand for (low-cost) U.S. oil would grow faster than the rate at which labor-per-barrel declines, which, arithmetically, increases net employment. This is a classic example of what economists call the “comparative advantage” of highly productive low-cost producers winning and creating jobs.

Of course the digitalization of oil and gas, quite aside from its salutary employment impacts, has trade and geopolitical relevance. The United States already exports more petroleum than all but three of OPEC’s 12 members—and the IEA forecasts that the U.S. will supply half of all of the world’s net new energy needs in the coming decades. In fact, the odds are good now that America will produce enough oil within two decades to become a net exporter for the first time since 1953.

One cannot talk about oil’s future without addressing the impact of electric cars. The question is: Should we be more focused on jobs shifting to making batteries rather than producing oil? Proponents hope that electric vehicles (EVs) will become so popular so fast that demand for oil will shrink instead of grow. Certainly, there are far more EVs on the road now than ever in history. But all the world’s EVs collectively displace just one minute’s worth of current daily world oil production. Of course batteries will get better and there will be more electric cars yet. But even a one-hundred-fold increase in the number of EVs within two decades—a growth greater than the most ambitious forecast from the International Energy Agency—would still leave the world using more oil than it does today.

It bears noting that Asian firms, especially in China, will likely continue to dominate the growth in commerce and employment associated with producing batteries for electric vehicles. Meanwhile, automation will enable the United States to dominate the far larger oil and gas domain. That might be a fair trade when it comes to the future of work.

Mark P. Mills is a senior fellow at the Manhattan Institute and author of Work in the Age of Robotspublished by Encounter Books in June 2018.

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