Dead Weight Loss, Windfall Profit, and the Solution to the Helium Market

Helium enables fundamental scientific research, medical imaging, semiconductor and
optical fiber manufacturing, military and space rockets, and more. These technologies have grown exponentially so demand for helium has too. But helium is only produced as a byproduct of rare helium-rich natural gas so supply is almost perfectly inelastic. Because production decisions optimize for the dominant natural gas industry, rising demand does not lead to significant increases in production. In such an industry, government regulation could be expected to promote conservation. Instead, the federal government floods the market with cheap helium. In accordance with the 1996 Helium Privatization Act, the Federal Helium Reserve is required to sell off annually an amount of crude helium that accounts for 30% of global supply. The goal is to repay a $1.3 billion debt to the U.S. Treasury but the price at which they sell helium is far lower than would be reached in a free market. This “subsidized’ price causes helium to be wasted even though there is scarcity. When federal helium sales cease, prices will sharply increase to free market levels. Overall, this unsophisticated policy causes significant dead weight loss, harming the many industries that rely on helium. Certain companies, however, benefit. In general, helium distributors benefit from subsidized wholesale prices. More specifically, particular distributors such as Air Products, Praxair, and Linde are not only grandfathered in to receive a significant allocation of cheap helium, but in addition they actually enjoy market power written into the law. The helium industry lacked a thorough economic analysis into these issues. Nevertheless, legislators became aware of the general problem from a National Academy of Sciences report on the helium industry. For years they did next to nothing. Even when bills were introduced to both the Senate and the House, the bills died in committee. Finally, in 2013, a new Helium Stewardship Act was introduced and passed by Congress. On October 2, 2013, President Obama signed it into law. The 2013 Act directed the Secretary of the Interior to taper helium sales and slowly move away from the inefficient allocation of helium to grandfathered distributors, changing to a new auction allocation. This change will be implemented slowly beginning in fiscal year 2015. It addresses the major problems discussed in this paper, but it does too little too late. Most of the Federal Helium Reserve has already been sold wastefully, and as the law is slowly implemented, the windfall profits and dead weight loss will continue.