published Wednesday, May 1st, 2013

Personal Finance: Imagine a birthday party with no balloons

Chris Hopkins

Breaking news: the U.S. House of Representatives, in a broadly bipartisan 391-1 vote, passed the Responsible Helium Administration and Stewardship Act of 2013. Who knew we had a looming helium crisis? But the fact is that the action was necessary to address a growing supply shortage that threatens to affect most every American.

Helium is the second most common element in the universe. And yet it is in short supply, in part, because of government efforts to guarantee its availability. It is a classic study in how well-intentioned intervention can distort markets and produce a result opposite to the intended effect.

In 1919, Congress established a federal program to ensure an adequate supply of the lighter-than-air gas to keep its fleet of military airships aloft. By the late 1950s, dirigibles no longer patrolled the skies, but helium had become an indispensible material for use in welding, as well as in low-temperature physics experiments essential to Cold War weapons research.

From 1925 until 1960, the U.S. government operated the only domestic production facility specifically built to extract helium from natural gas. Then in 1960, Congress created the Federal Helium Reserve, consisting of a network of pipelines connecting 23 federal gas wells, a processing facility to separate the helium, and a massive underground storage facility 3,000 feet below ground inside a porous rock dome near Amarillo, Texas. The storage dome can be thought of as a giant rock sponge that can absorb a huge quantity of helium under pressure, and is the only facility of its kind in the world. The location is also adjacent to gas fields in Texas and Oklahoma that contain high concentrations of helium.

With the end of the Cold War, Congress rightly recognized that helium production should be privatized. The 1996 Helium Privatization Act required the government to sell off its stockpile by 2015 and make way for commercial interests to take over. Good idea, bad implementation.

The 1996 law required that the inventory be sold below current market prices. This left little incentive for private suppliers to invest in new production capability to take over Uncle Sam's helium production. Meanwhile, commercial uses for the Noble gas ballooned (sorry), finding important new applications in MRI imaging, optical fiber production, and superconductors in scientific research. Prices have quadrupled since 2000 thanks in part to the government-induced supply shortage.

Hence the recent action in the House to fix the imbalance. The act mandates that the remaining inventory in the strategic reserve be sold in a series of auctions in order to restore market-based pricing, and provide a profit incentive and sufficient time for private companies to ramp up production of the essential gas. A small stockpile will be retained for military and national defense purposes, but the government will soon be out of the price-fixing business.

Crisis averted. And the one vote against the measure? California Rep. Linda Sanchez says it was an error and will change her vote to "aye." Perhaps we should release some balloons to celebrate a rare unanimous vote in Congress.

Get answers to financial questions on Wednesdays from our columnists who work in the financial services industry. Christopher A. Hopkins CFA, is a vice president at Barnett & Co. Submit questions to his attention by writing to Business Editor Dave Flessner, Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by emailing him at dflessner@timesfree press.com.

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