ECONOMICS OF HELIUM STORAGE

How much helium should be kept in storage depends on several factors. Economists typically give primacy to market efficiency, but other issues may be just as important to policy makers, who must consider societal objectives such as equity and national security.5 In a normal competitive market, indications of static efficiency include the absence of major shortages or surpluses and a price that is equal to the marginal production cost plus the intertemporal opportunity cost (or user cost). The limited number of helium refiners makes assessment of competitiveness and static efficiency difficult, as does the practical difficulty of measuring user costs. Dynamic efficiency, which is concerned with the optimal time path of extraction and storage, is even more difficult to assess.

Storage is particularly important in the helium market because of the nature of the supply and the contract structure of the industry. The joint-product relationship between helium and natural gas, together with the seasonal fluctuation of natural gas demand, makes helium production quite variable. Events such as maintenance shutdowns can also significantly affect the regularity of supply, both within the United States and internationally. Storage helps to smooth this volatility and thus serves as a sort of insurance policy. Storage also facilitates the conservation of helium when high demand for natural gas would otherwise lead to helium production in excess of demand. In some industries, market institutions provide a similar "insurance" function. As shown in Table 5.1, however, the contract structure of the helium industry allows no futures market and only a limited spot market. The lack of these market institutions, especially the lack of a spot market, increases the importance of inventory holdings in the helium market.

What is the optimal quantity to store? Although the direct cost of helium storage is minimal, an idle asset yields no return on investment and thus has an opportunity cost. From a government perspective, the rationale for storage is usually the maintenance of a critical reserve supply for contingencies. For example, the Strategic Petroleum Reserve was created to insulate the economy from oil-price shocks. From a private perspective, the rationale for storage (of agricultural commodities, for example) is usually the desire to maximize returns as prices fluctuate.

The optimal storage quantity is reached when the marginal cost of additional inventory plus the marginal cost of storage equals the marginal benefit of inventories drawn from the stock (Bohi and Montgomery, 1982).6 If social costs and benefits are associated with the stored good, then the social marginal costs and marginal benefits must also be balanced. In either case, as noted earlier, the balancing is an inherently intertemporal decision reflecting expectations about future prices as well as the discounting of opportunity cost associated with resource extraction.

5  

Equity is especially difficult to gauge because, unlike economic efficiency, it has no universal definition. For helium, the issue is one of intergenerational equity: whether an adequate supply will be left for future generations. Because helium is nonrenewable, pure sustainability is impossible; we cannot leave as much for future generations as we have today ourselves. The concept of sustainability can reasonably be broadened, however, to permit helium consumption that increases the stock of other assets, so that equal overall assets are left for future generations, even though there will be less helium. Perhaps the greatest complication, though, is that using a discount rate to reflect the time value of money has a negative connotation when considering periods longer than 20 to 30 years, because it implies that future generations are less important than today's.

6  

From society's standpoint, the resource added to the inventory is not actually used up at that time, so the resource cost is not incurred until it is drawn down or used. Also, storage expenses of helium are minimal, so the cost during most of the storage period is the opportunity cost.



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