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The Impact of Selling the Federal Helium Reserve
to what extent the government has crowded out private-sector storage and what has been the effect of expectations about government releases on incentives to store. In other words, it is hard to know whether the quantity of private storage is likely to be adequate to allay legitimate concerns about a potential shortage for ''critical" government uses. Even if it is not, the shortfall does not necessarily imply a requirement for government storage (as distinguished from government provision of storage facilities, for example by lease to the private sector). Rather, economic incentives to induce additional private supply could be a viable alternative—e.g., government contracts for purchases of helium or reducing the profit tax rate applied to helium production (Epple and Lave, 1980). It is also important to note that these questions about storage are related to, but nonetheless separate from, provisions in the Helium Privatization Act, which prescribe the pace of disposal and the price at which federal sales are to occur.
Decisions regarding the optimal private and public storage of helium are severely restricted by the current reserve base, the long-term contract structure (including take-or-pay provisions), and the dominance of natural gas extraction. As shown in Figure 4.2, based on current trends the production of helium over the next few years is likely to be in excess of demand, resulting in increased private storage. The rate of helium production will not be reduced to eliminate the temporary supply surplus, because refiners must purchase all the helium by-product generated by natural gas extraction, which is driven by the market for natural gas, not helium. In the near future, however, helium production will fall below helium refiners' demand levels, with the deficit being covered during the first couple of years by private inventories. Thereafter, helium will be purchased from the federal reserve to make up the shortfall. There is little further flexibility in additions to or withdrawals from storage. The levels of public and private inventories will drop continuously unless additional reserves are discovered (or resources are translated into reserves).