Selling off the federal reserve - of Helium

The government evidently has a huge reserve of helium in some underground location in Texas. Like gasoline, helium is another resource that is widely used in a number of industries from cellphones to computers. Yet the real point of interest in this NPR story on Helium Reserve is that although the government is opening up the reserve to sell on the market, ostensibly to lower the price of such a important commodity, it is having the opposite effect.

Normally we would expect as the supply increases given static demand, the quantity demanded would increase while at the same time the equilibrium price would decrease. However what is happening is that the additional supply has just enough downward pressure on price to keep a number of private suppliers from entering into the market. By keeping the price 'low', there is no incentive for private companies to produce helium because there is not enough margin. If the price of helium were allowed to rise, then potential firms would take this as a signal there is profit to be made and enter the industry. Existing firms would feel  more secure to invest in additional capital equipment that would increase their efficiency through economies of scale and in the end, lower the price for consumers.

Until then, we will just have to do without squeaky voices at parties.


Dave Tufte said...

Moh A gets 100/100.

I have heard a couple of sides to this helium story, and I'm not sure what's going on yet. Here's a couple facts I know, without much economics.

1) Yes, the Feds are selling off their helium reserve.
2) I have not heard of producers being unable to turn a profit before. I did hear that retailers are unable to get supplies because prices are up and quantities are down (a classic shift of supply to the left).
3) Helium isn't really "produced". Instead, it's captured from oil drilling. It isn't free to capture, and it's expensive to store because of leakage. So I don't think they're going to bother if the price isn't high enough.

Dillin said...

When I first read this post I wasn't very interested in the supply or demand of helium. Last week was my daughter’s birthday, and when we went to buy balloon the store didn't have any helium. They said their supplier didn't have any to supply. Needless to say, I became more interested in the subject.
The article made it sound like the government wasn't trying to manipulate prices. It sounded like the government was just trying to sell off their reserve, due to the fact that we no longer have a threat of a blimp war. What doesn't make sense to me is why there is a supply problem. If the government is selling at market prices, why would that stop other companies from entering the market? If the government is not selling at market prices, why would they not? And last, if there is such a high demand for helium, why is it priced low enough to be consumed by filling up balloons?

Dillin said...
This comment has been removed by the author.
madhatter said...
This comment has been removed by the author.
madhatter said...

I agree with Moh A's assessment. It seems that just the specter of the government upsetting the price equilibrium by potentially releasing more supply of helium with attendant falling prices is causing current suppliers to back away from further production. This seems to be a case of our all-knowing central planners getting it wrong again. To bad they didn't have the little Aplia Supply/Demand calculator to see the unforeseen consequences of their actions. (Why did they keep the helium so long past its usefullness to the military?)

Dave Tufte said...

Dillin: 47/50 for a pluralization error. madhatter got 47/50 for using an incorrect word.

Dillin asked 3 questions.

1) I don't think anything is stopping private suppliers from entering the market. But, you have to wonder if they are receiving the price signal to do so?

2) Why would the government not sell at market prices? Because ... it's filled with people with control issues who think they know a better price. I'm not saying that's going on in this case ... but it's happened before.

3) Why is helium so cheap? Helium isn't produced, or even refined. It is mostly a byproduct of oil and natural gas drilling. It's not harmful if released into the air, either. So, for someone to capture it, they've got to have an entrepreneurial vision to go out to wells and install helium capture equipment, and then sell what they harvest. The price is so low because the U.S. has heavily encouraged helium production in the past. So, actually there's a glut. But the glut isn't getting out to consumers. Weird ... and I don't know enough about it to say why.

madhatter raised 2 points.

1) I don't think it's the specter of government so much as the government is already the 500 pound gorilla in the room. They have a huge amount of backing down to do before this market starts to behave like those in texts.

2) They kept the helium reserve so long past its usefulness because that's what governments do. Part of this is accounting. Governments are really bad at accounting for opportunity costs; in some cases they're actually forbidden from using them in decision-making. The result is really poor cost-benefit analysis.

FWIW: the government subsidizes mohair production for the military. This subsidy was eliminated in 1995, and brought back because of pressure from citizens who ... liked the subsidy checks. The original reason for the subsidy was that mohair was what you put on the bottom of cross-country skis to keep them from going backwards. This was thought to be useful when we thought we'd be fighting the Soviets in the Arctic. I used to cross-country ski a lot. I had a pair of mohair skis in the 70's. They were already outdated at that time.