Because of its unique traits, helium is used in a variety of scientific and industrial processes including semiconductor production, optical fiber manufacturing, and magnetic resonance imaging. Many of these high-value activities have few or no viable alternatives to helium. A sudden large decrease in supply would have serious consequences for the U.S. economy.
Most helium is produced as a derived product of natural gas from fields with a relatively high proportion of helium in them. Assuming that the price of helium is high enough, it can be worthwhile for the gas producer to separate this helium out. Beginning in 1960, the government tried to encourage private production of what was then regarded as a strategic resource by entering into long-term contracts with domestic producers to purchase helium for the Reserve. It financed these purchases by borrowing from the Treasury. By 1973 the government had accumulated over 53 years of supply and a debt (to itself) of $1.3 billion.
In 1996 Congress voted to sell off almost all of the Reserve by 2015. However, it did so in a way that has created problems today. It based the price of sales on a calculation of what was needed for the government to repay itself instead of on market realities. It also required that the same amount, currently 2.1 billion cubic feet, be sold each year, until only 600 million cubic feet remained, again irrespective of market needs at any particular time. As a result, government sales set the market price and dominate supply.
Private suppliers are normally very good at finding new sources of supply and alternative resources when prices rise. Similarly, buyers cease low-value uses and become more efficient. However, this process requires time. In the short-run both supply and demand may be unable to respond, leading to high prices and inefficient rationing and production cutbacks by helium users
Ending the program now would be especially troublesome because the world is experiencing a temporary shortage of helium. The reasons include a significant increase in global demand, production problems at other plants, and the recent drop in natural gas prices, which has reduced natural gas production of which helium is a by-product.
To address the helium supply still left in the reserve the government should create an auction system that reduces the supply slowly over time so markets can adjust accordingly. Auctions ensure that the resource is devoted to those who value it most highly and, once the sale is made, they give the buyer an incentive to continue to use the resource optimally. They also do the best job of maximizing government revenue. As a result, auctions have been widely used to allocate public radio spectrum to the private sector. These auctions have produced significant revenues for the government while helping to ensure that wide areas of spectrum are used as efficiently as possible.
However, rather than auction all of the helium at once or at the past schedule, it would be better to selling it off over 10 years, with annual sales declining in each year. A gradual decrease in sales is likely to reduce the costs of market disruption and provide the private market with enough certainty and time to enable it to respond in a timely manner. Moreover, according to the National Research Council, reducing withdrawals over time maximizes the total amount of helium recoverable from the Reserve.
Preventing the imminent shutdown of the Reserve program will avoid an unnecessary disruption in an important market. Making sensible changes in how future sales are conducted will maximize government revenues and give the helium market time to adjust to the Reserve’s depletion.
Kennedy is a Senior Fellow at the Information Technology and Innovation Foundation.