Royal Dutch Shell Group .com

The Sunday Times: Skill shortages hit quest for extra energy supplies: "Drilling rigs are in short supply, as are trained oilfield workers. This is why fully one-quarter of the $4 billion increase in Shell’s outlays will go to cover the higher prices of the labour and supplies it needs to punch holes in the deserts and ocean beds that contain the new reserves it so badly needs.": Sunday December 18, 2005

American Account
IF the Federal Reserve Board’s monetary-policy gurus have any doubt that “possible increases in resource utilisation ... have the potential to add to inflation pressures”, as they said in last week’s statement accompanying their 13th consecutive increase in interest rates, they need look no further than Shell’s announcement the following day.

The new consensus that crude oil prices will stay at or above $50 a barrel has had several consequences. Like its oil-industry competitors, Shell has raised its spending on exploration and development, in its case by 27% to $19 billion (£10.7 billion). Kuwait has decided to draw on western expertise to help it develop its untapped reserves, which look a lot more attractive at $50 than they did at $10. Other oil companies are scrambling for drilling rigs, labour and supplies.

The expectation that oil prices will stay high reflects the continued pressure economic growth in America, India and China is putting on oil supplies.

Demand is also pressing on the supply of natural gas in many countries. In America, cold weather is driving demand and prices to levels unimagined when natural gas became the fuel of choice for power generators, many of whom are ruing that decision. In Britain, rising demand and monopoly constraints on supplies from the Continent are having the same effect on prices. And western Europe will face a difficult winter if a dispute between Russia and Ukraine, through which Russian natural gas passes en route to Germany and elsewhere, is not resolved.

Electricity shortages also threaten, or at least are seen by policymakers and large users as likely to occur before the decade is out. So nuclear power is once again being considered as a solution to the problem of keeping the factories running without increasing carbon emissions. And much of the political opposition to wind farms from all except the hardcore Nimby crowd seems to be dissipating, clearing the way for increased production of electricity from wind.

But the willingness of investors to come up with the money needed to augment energy supplies cannot alone solve the supply problem, at least not soon. It seems that there is a shortage of many of the resources needed to find and to construct new sources of energy.

Drilling rigs are in short supply, as are trained oilfield workers. This is why fully one-quarter of the $4 billion increase in Shell’s outlays will go to cover the higher prices of the labour and supplies it needs to punch holes in the deserts and ocean beds that contain the new reserves it so badly needs. That’s just what the Federal Reserve has in mind when it worries that resource constraints might result in an inflation-inducing bidding war for supplies and labour.

The situation in the wind business is no different. Promoters and operators of wind farms are finding that they simply cannot get the machines (windmills, to us lay folk) they need. In some instances, manufacturers are diverting supplies to the United States to take advantage of a new and attractive tax regime. In all instances, prices are rising and waiting times for delivery are lengthening.

Nuclear advocates, too, have to confront a shortage of resources, most notably the skilled technicians needed to build and operate these facilities. With no new nuclear plants built in the United States for decades, the engineers and other highly trained staff that build these have drifted into other jobs. It will be no easy thing to reconstruct a workforce capable of building safe plants, once plans to start construction get the multiple planning and safety approvals they need — if they ever do.

The inability to expand energy supplies creates a political problem. The political and economic cycles are out of joint. Higher prices for energy will, eventually, call forth additional supplies and curtail consumption. But “eventually” is not good enough for politicians, who must do, or at least be seen to do, something right away.

So we get counterproductive moves such as chancellor Gordon Brown’s retroactive windfall- profits tax on oil companies, and a similar move by America’s Congress to appropriate “excess profits” while lavishing subsidies on uneconomic sources of energy. Everywhere, politicians express a new interest in nuclear power, but no interest in learning about its cost.

Meanwhile, the American economy seems to survive the waste created by politicians’ renewed interest in energy, and their unwillingness to give markets the time needed to sort things out. Growth continues at an annual rate of something like 4%. The drop in petrol prices to about $2 a gallon, from a high of $3, has increased both consumer confidence and the level of cheer in America’s boardrooms.

A survey by TEC International, the “world’s largest organisation of CEOs” of small and mid-sized companies, shows that “on average, a majority of CEOs expects to see increased sales revenues, profits, investments, and employee numbers” in the next 12 months.

More significant from the point of vies of the Federal Reserve is the fact that more than half of the chief executives plan to raise prices next year. Those pundits who are expecting the current cycle of rate increases to end when Alan Greenspan leaves the stage in January, might want to think again. It is true that short-term rates are now 3.25% above their low in 2004, and that the housing market is showing signs of cooling. But in real, inflation-adjusted terms, interest rates are still only a bit above 2%, which is below the long-term average, and not deemed likely to stifle growth.

As the Federal Reserve watches Shell being forced to pay more for labour and supplies, and hears that chief executives are thinking about raising product prices, it is not likely to abandon the Greenspan upward ratchet merely because it has a new chairman. 

Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute. He has served as a consultant to many energy companies and advises a leading developer of wind farms.

Print this article Send to a friend Back to top of page

Click here to return to HOME PAGE

Click here to return to Royal Dutch Shell Group .com