of perpetual inventory replacement (see Adelman, 1997), with prices increased only by rising exploration and extraction costs, probably less than 1 percent per year. Factors such as the availability of substitutes or the substitution of capital for natural resources can mitigate nonrenewable resource scarcity (Krautkraemer, 1998). Moreover, because every unit of a nonrenewable resource that is produced and consumed today is one less unit available for the future, the value of helium to society may be more than its value to producers.

Second, demand for helium, as for most raw materials, is primarily a derived demand. That is, most consumers of helium use it not as a final product but as an input to the production of other goods and services. Predicting demand for helium thus depends on predicting demand for these other products. Technological breakthroughs in some of the applications discussed in Chapter 3 could result in substantial increases in helium demand. By the same token, other technological breakthroughs could decrease demand. Even for some existing applications, especially those related to national security, future demand is hard to predict.

Third, there is potential for consolidation among helium suppliers. The market has multiple stages, from the extraction and storage of crude helium to the refining, transportation, end use, and recycling of pure helium, but the product changes form only at the extraction and refining stages, and then only in terms of purity. This increases the potential for vertical integration among existing firms. In addition, new firms may be discouraged from entering the market by the dominant role of the natural gas market and the government's strong involvement in helium supply and pricing decisions. For example, the government has often (although not always) sold helium at a price that is below competitive levels.

Fourth, helium is a by-product of natural gas production, so the behavior of the helium market is dominated by conditions in the natural gas market. This fact has many implications, which are, however, not fully understood, because current economic models for the optimal extraction and storage of nonrenewable by-products are inadequate.

THE EFFECT OF A FIXED FEDERAL SALES PRICE

A formula in the Helium Privatization Act of 1996 specifies the future price for sales from the federal helium reserve. Mielke (1997) calculated this price to be $43 per thousand scf (in 1996 dollars). In contrast, the price in the private market is currently about $32 per thousand scf. Chapter 4 suggests that even in the relatively near future, helium producers will have to purchase some federal helium at the $43 price to compensate for production shortfalls (see Figure 4.2b). There are additional implications, however, if the government price remains constant.

First, the government price will eventually act as a cap on private market prices. The time at which that cap becomes relevant will depend on the rate at which private market prices appreciate. As shown in Figure 5.1, if real private prices rise by only 1 percent per year, the cap will not be reached until almost 2030. If they increase at 5 percent per year, the cap will be reached in 2006.3 At an intermediate appreciation rate of 3 percent, the cap will be reached in

3  

If the appreciation rate was 5 percent, or if a significant risk premium was applicable to investment in the inventory, the implied growth in demand would be greater than that implied by the 3 percent appreciation rate. A 5 percent growth rate might make the reserve attractive to speculators. The 1 percent growth path would reflect mistaken judgement of those who recently invested in private inventories. This scenario would most likely involve choppy price movements rather than the smooth curve depicted in the figure. If the appreciation rate was negative (a scenario not depicted in Figure 5.1), then the price of private crude helium would never reach the $43 per thousand scf federal price.



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