TABLE 5.1 Helium Market Institutions

Institution

Existence

Reason

Field sales

 

 

Spot market (1-year contract or specific quantity)

Some

Helium owner is different from extraction company

Futures market

No

Contract may have price change limitations or may specify future price

Long-term contract (multiyear)

Yes

Usually required to accept and pay for all helium produced (standard practice for extraction)

Refinery sales

 

 

Spot market

Yes (very small)

For specific experiment or short-term use

Futures market

No

Contracts may have price change limitations

Long-term contract (1 to 3 years)

Yes (very common)

Typical supply to users who have a continuous requirement

Long-term contract (3 to 15 years)

Yes (less common)

Where supply requires large investment at customer site

A formal model developed by Epple and Lave (1980) provides some approximate results for a particular set of parameters. In that model, storage is usually found to be desirable except when the discount rate is high (e.g., 10 percent).

If storage is determined to be desirable, the next question is whether the private sector will maintain a sufficient quantity on its own. Hitherto, government storage of helium has always been a given, so there is no experience with exclusively private-sector inventories. Epple and Lave (1980) suggest that an appropriate level of storage could be undertaken by the private sector. The optimal inventory size determined by the market could then be smaller than the optimal size determined by social criteria, however. For example, the private sector might undertake too little storage (from society's point of view) if its estimate of future prices understates helium's marginal social value. Even if private storage is smaller and more volatile than is socially desirable, however, there is an incentive, if prices fluctuate, for the private sector to hold precautionary and speculative inventories.

If the policy choice is a combination of public and private storage, the optimal mix depends not only on the factors that prevent private holdings from reaching the socially optimal level but also on the feedback effect of government reserves on the size of private reserves. In general, given information about the size of the public stockpile, the prospects for its sale, and the government's supply policy, including price, the private sector can be expected to adjust its inventory accordingly. Experience with the Strategic Petroleum Reserve demonstrates that government storage can crowd out private-sector storage and that expectations about government pricing and drawdown policy can significantly influence private-sector storage incentives (Bohi and Montgomery, 1996).

The private sector is already storing helium (see Chapter 2), but there is very little flexibility in its inventory decisions. The decision to store appears to be based on the prevailing long-term take-or-pay contracts and a desire to maintain future supplies, as reflected in the development of both spot (immediate to 30-day delivery) and forward markets (delivery approximately one year in the future). Because government helium storage has never been absent, however, it is unclear



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