Helium is something you probably don't think much about unless you are buying balloons at the fair or like to make your voice sound funny. It's also something you may periodically have a hard time finding when you walk into a local party planning store hours before the guests arrive for that birthday party that you have been planning. That's because helium is a non-renewable resource in an industry dominated by an unusual infrastructure, a small number of entities and a hierarchical distribution system that prioritizes deliveries based on how a given customer uses the gas and the customer's financial clout.
SEE: A Natural Gas Primer
Background: the Element
Even though Helium is one of the most common gases in the universe, it's a rarity on earth. Helium has some interesting characteristics that make it particularly useful in a variety of military, industrial and medical applications.
Helium became of interest to the military in World War I, not only because it provides lift, but also because of its inertness, which means that it does not readily react with other elements or chemicals. To understand the value of these properties, consider the explosion of the Hindenberg in 1937. The famous zeppelin was filled with hydrogen, a gas that provides more lift than helium but is also quite reactive, as demonstrated by the disaster that resulted in the airship's destruction. Military interest in helium was revived in the 1950s during the Cold War, at least partially because of its chemical properties make it ideal for purging and pressurizing rocket engines. To this day, the government and military entities remain interested in a variety of uses for helium.
Helium also has a host of other applications. It serves as a coolant in magnetic resonance imaging machines in hospitals and in nuclear reactors. It is used as a protective gas in arc welders, in growing silicon wafers and in preserving historical documents. Of course, Helium's best-known commercial use is in balloons at parties and celebrations.
Capture and Storage
While helium is present in the atmosphere, it is found in concentrations that are not concentrated enough to make its capture and storage economically viable. Stronger concentrations are found in some natural gas wells and extracting it from those wells is the process used to fuel current demand for the gas.
Of course, capturing helium is only half of the challenge. Storing a gas that is lighter than air is the other half of the challenge. To solve this problem, the U.S. government mandated the creation of the National Helium Reserve (also referred to as the Federal Helium Reserve), a long-term storage facility for unrefined helium.
The U.S. Government's Role in the Market
The United States, which is the dominant player in the helium market, began a formal program to create a domestic source of helium with the opening of a helium production plant in 1921. In the 1950s, the Cold War revived interest in helium, and the government began to acquire and store helium at a Texas-based facility known as Cliffside. To encourage a private industry's participation in helium extraction, the government became the buyer of last resort, snapping up unsold supply. It also collaborated with private industry, letting private companies store their helium in the government-run Helium Reserve.
Despite its interest, the government's role in helium production has been a money-losing proposition. In 1996, the government began a long-term effort to minimize its role in helium processing, with the passage of the Helium Privatization Act. The act set a price for the share of helium in the reserve owned by the government and mandated that government entities using helium had to purchase the gas from the government's stockpile. At the time, that price was set at $43 per 1,000 cubic feet, 25% above the market price, with the logic being that government entities would make purchase from the stockpile and that such pricing would recoup the outstanding debt from helium operations.
Over time, that price became the de facto ceiling, artificially keeping market prices low. In response to criticism, the government raised the price to $64.75 in 2010, $75.00 in 2011 and $75.75 for the 2012 fiscal year.
The market price would likely be double that if the government was not involved in price setting. By 2015, the government's role in the market will be largely limited to providing producers with access to the National Helium Reserve's storage facility.
Because helium is hard to obtain, transport and store, there are only a limited number of companies and countries involved in its production. When those countries experience a production challenges that reduce their output or when production plants are closed for maintenance, periodic shortages occur. When this happens, the available supply of the gas is rationed. Military and medical uses sit at the top of the priority list, as do big customers that have locked in long-term contracts. The result is that low-volume users, such as the local store selling a few balloons, do not receive deliveries. Currently, this means that you may have periodic difficulty when trying to fill up those birthday balloons. In the future, it could mean that this rare gas becomes more difficult and costly to obtain for all users.
Despite the U.S. government's diminishing role in helium production, global demand for the gas continues to rise. Any time a scarce resource is in demand, investors may have an opportunity to generate a profit. Unlike other commodities, such as cattle and soybeans, there is no direct futures market on which helium is traded. Rather, investment opportunities revolve around companies that operate in this space.
Even here, the biggest players do more than just sell helium. Air Products (APD), the world's largest supplier of helium, is a prime example. Praxair is another notable supplier. ExxonMobile is also a player in this space. There are also a variety of smaller players, including The Linde Group, Pioneer Natural Resources and BP. With a little research, you can learn more about these and other companies involved in the business of extracting, processing and selling of helium.
SEE: Commodity Funds 101
The Bottom Line
While helium is rare, we are unlikely to run out of it anytime soon. We are also unlikely to find a hidden cache that drives prices lower. This means it will continue to be in demand, presenting an opportunity for businesses and investors to make a profit. Of course, helium isn't the only commodity that may be of interest to investors. From oil to cotton, gold to natural gas, there are a variety of resources and a host of investment possibilities. From traditional shares of stock to futures contracts, mutual funds and exchange-traded funds, a significant number of investment opportunities are out there for ambitious investors to uncover.