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Salmon: How Helium Is Like Mortgages

NEW YORK ( Reuters Blogs) -- John Kemp might just have delivered the perfect John Kemp column yesterday: 1,700 words on an obscure commodity you probably didn't even realize was a commodity. In this case, it's a noble gas: The Federal Helium Reserve (yes, there's a Federal Helium Reserve) is at risk of imminent shutdown, which in turn threatens everything from the semiconductor industry to MRI scanners. Already, at least one particle accelerator had to delay operations "because of problems obtaining fresh supplies of helium."

Kemp's column is based in large part on a 17-page GAO report that includes the chart below, showing the seemingly inexorable rise in the price of refined helium. (Another thing you didn't know: Helium comes in both "crude" and "grade A refined" versions.)

As you can see from the chart, the problem here isn't finding crude helium, so much as it is refining the stuff into something usable. Reports Kemp:

"Problems at helium refineries in Texas, Oklahoma and Kansas, as well as start up delays with new refining facilities in Qatar in 2006, led to shortages and rationing, as well as price spikes for some customers.

"Reliable and affordable supplies are essential. But around half of the helium used in the United States, and roughly a third of the gas consumed worldwide, is sourced from a stockpile in northern Texas left over from the Cold War."

helium.tiff

At the moment, the only way that helium can be sold from that stockpile is in order to pay down the debt that was run up in 1960 building the Texas facility. But thanks in large part to the soaring helium price, there's virtually none of that debt left -- and when it's all gone, the government can't sell any helium anymore. As a result, it's pretty urgent that Congress put in place some kind of mechanism to keep the sales going. The alternative would be devastating to many industries including the medical profession.

It also turns out that the U.S. government's role in the helium market is not dissimilar, in some ways, from its role in the mortgage market. Here's Kemp:

"The cost-recovery pricing formula ensured BLM was originally charging much more for its helium than other suppliers, minimizing the market impact.

But BLM has become such an enormous seller, in a market with few other competitors and substantial barriers to entry, that other suppliers have taken it as a benchmark, and moved their own prices higher to match it."

Essentially, when you're the U.S. government and you're a major participant in a market, you can't help but become the marginal price-setter. Whatever "Frannie" pays for mortgages becomes the market price for mortgages; whatever the government asks for helium becomes the market price for helium.

In both markets, the government wants out and wants the private sector to take over. But in both markets, the process of disentangling the government from the market is extremely difficult, because it can't just shut down its operations and leave the market to its own devices.

Because Congress has left the helium problem to the last possible minute, it's unlikely they're going to be able to come up with an elegant solution here. Instead, they'll just kick the can down the road by allowing the stockpile to continue to sell helium for another year or so. But over that time, someone is going to have to work out how to extricate the U.S. government from the global helium market. If and when that happens, I hope that mortgage-minded legislators are paying attention. Because it's long past time that the government stopped underwriting the vast majority of home loans in this country, and they could use all the ideas they can find.

-- Written by Felix Salmon in New York.

Read more of Felix's blogs at Reuters.

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