Google addressed this problem by raising the limit to 10,000 albums, but I'm not sure if that's the right solution.
"We want Picasa Web Albums to be a place you can share and store all your digital photos, regardless of how many you have. We recently made extra storage really affordable, but until now, Picasa Web accounts have been limited to a maximum of 1,000 albums. We heard that you needed more room, and because we want you to keep sharing your photos and posting them to Buzz, we've worked hard to now raise this limit to 10,000 albums."
Google could make these limitations less important by detaching photos from albums. Instead of uploading photos and adding them to a single album, Picasa could use labels to group related photos. Some labels could be created dynamically: place labels, date labels, people labels, while albums could be created manually or using filters.
{ Thanks, Dave. }