The oil and gas industry has long been associated with cyclical employment patterns, as commodity prices fluctuate. Three decades of high production and mass hiring, starting in the 1970s, followed by lower prices and layoffs, have soured an entire generation of workers. Presently, high hydrocarbon prices and a graying workforce has led to a new batch of industry hiring. However, the workforce has changed drastically over this period. With few traditional sources of workers available, executives are forced to find new ways the recruit, develop and retain key skilled employees (Figure 1).

Oil and gas companies must compete for the same pool of skilled talent, and thus generally follow similar ideals regarding the management of human capital. These companies not only look first at industry peer groups for financial and production measurements, but they also make comparisons in compensation structure, benefits and workforce performance management.

The overall supply curve is most refined and focused by performance management philosophies. Every company wants the best and brightest, and desires to ensure the top performers in the organization receive the recognition they deserve. However, this has led to a pattern of actively managing performance to a bell curve standard to the detriment of the rank and file worker (Figure 2). Even when the companies are doing well and everyone is meeting expectations management might apply this curve and determine that certain workers are more deserving of rewards and incentives. By managing performance in this manner, companies have, in essence, voluntarily limited their access to a portion of the supply curve for engineers.

The US labor market also includes many foreign nationals who attend US colleges and universities. However, due to restrictions in immigration laws a certain percentage may not be desirable candidates, even if they are willing to work for lower wages. So again, the overall (or "global") supply curve is modified by the industry itself and the elastic portion of the curve is removed from consideration, leaving only the main upward sloping supply line (Figure 3).

Short-term supply and demand

With oil reaching more than US $50 per barrel, domestic reservoirs that were not commercially viable when oil was $18 per barrel are now available and being reopened by smaller, independent producers. These independent companies are entering the marketplace for talent and targeting the engineers who may be disenchanted with their current situation or younger talent who prefer the entrepreneurial (i.e. high risk, high reward) aspects of working for a smaller firm. This new demand is not satisfied from the current educational institutions.

Also, generational differences in the workforce have not been addressed by many of the more established firms. Employees in Generation X and Generation Y are less willing to forgo certain work-life balances that may come with a career in the industry.

There is another issue affecting equilibrium of the market, mainly, the fears driving the demand upward based on the "perception of scarcity." Many owners and managers of firms fear that older workers are retiring earlier and will leave strategic voids in the professional and management ranks.

An API survey found that the average age of a petroleum engineer in the United States is 41 years old. Even under the most generous of retirement plans, and assuming that a large portion of the workforce retires, that still leaves approximately 14 years to train and develop new workers in the industry. When the survey asked for companies to identify specific areas of expertise where they see potential shortages in the supply by 2009, "petroleum engineering" was selected most frequently (68% of the time).

The trend of younger to mid-level employees leaving companies for newer opportunities, combined with fears about the "graying" workforce, is driving the demand curve even further to the right while the supply curve stays intact. The result is that companies may be implementing additional hiring initiatives and retention programs absent an actual scarcity just based on this perception that in 5 years the entire workforce to going to retire. This could result in an exaggerated shortage of engineers on the market. Also, petroleum and other industry engineers are going to come at a premium until something can be done to shift supply or adjust to the new equilibrium.

Proposed Solution #1: Keep the current workforce in place longer: There are two methods for keeping the current workforce in place longer. One would be to create economic incentives to encourage a portion of the workforce to postpone retirement until the supply of new engineers can be replenished. Another option would be to develop a contingent workforce from retirees. With today's incentives programs and pension plans, many engineers are opting for retirement at an earlier age; some as early as 50 or 55 years old. This portion of the workforce may still wish to work in the industry on a full- or part-time basis.

There are drawbacks to both these methods in the long term. Using further economic incentives to keep the current workforce in place would create future liabilities for pension and benefit payments that would be borne by the firm in the long run. Also, diminishing returns might set in, as it becomes economically inefficient to provide the higher compensation levels required to keep a large contingent worker over a less experienced, regular employee. Most importantly, at some point there is a finite amount of time that many of these workers will make themselves available and willing to work.

Proposed Solution #2: Tap into more Foreign Nationals: As more oil reserves are discovered internationally, it may be more affective to hire qualified candidates from the home country of the asset base. While this longer-term solution may seem ideal, there are several drawbacks that must be considered.

First, there are the issues with US immigration. Employees who intend to work in the United States must be eligible to work for the needed period of time, which creates an administrative burden on the firm in processing and petitioning for work permits. It also creates some instability since an employee may face an issue with a visa or work permit that could halt a project or an operation midway through. Another issue is the semi-permanence of the shift of the supply curve adding these workers would create. Once this pool of candidates is included, the supply curves shifts to the right indefinitely, and only an increase in demand over time will keep a surplus from occurring in the long run.

Finally, there is the issue of corporate identity. When foreign nationals work away from the headquarters, there is a sense of detachment from the organization and a loss of corporate identity and culture.

Proposed Solution #3: Job restructuring: The third alternative addresses the supply shortages in the short-run, but also accounts for future, long-run fluctuations in the demand curve without making permanent adjustments to the market that might create a future surplus. This can be accomplished by finding alternatives in the market. Mechanical engineers could fill drilling positions, or electrical engineers could handle facilities positions. By restructuring the positions in this manner, the petroleum engineers could oversee and advise the work of the other professionals and have more time available to handle the core duties that must be performed by a petroleum engineer.

Executives that do not panic, but who act nimbly in their hiring processes, and carefully manage their current employees will find the most success in the short-run shortages.