The Great Debate

Bipartisan bills introduced into the U.S. House of Representatives and Senate aim to avert the imminent shutdown of the Federal Helium Reserve, which provides a third of all the gas consumed worldwide, and develop a proper market to avoid a long-term crunch in supplies of one of the world’s most obscure but vital raw materials.

Helium is best known for filling party balloons and making people talk funny. But its properties as the second-lightest element, chemically unreactive, and with a boiling point just 4 degrees above absolute zero, make it essential for a wide range of cutting edge scientific applications.

The biggest uses of helium are too cool the superconducting magnets used in magnetic resonance imaging (MRI) scanners, help manufacture semiconductors and fiber optic cables, and purge and pressurize the liquid hydrogen/oxygen propulsion systems on space rockets, including the giant Delta IV launch vehicles that put spy satellites into orbit from Vandenberg Air Force Base in California.

Prices for refined helium sold to end-users have quadruped from $40 per thousand cubic feet in 2000 to $160 in 2012, according to the Government Accountability Office, which warned the Natural Resources Committee of the House of Representatives of “urgent issues facing the Bureau of Land Management’s storage and sale of helium reserves” at a hearing on February 14.

Prices and availability have fluctuated wildly in the last five years. 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.

By John Kemp
The writer is a Reuters market analyst. The views expressed are his own.

LONDON – Should federal government agencies have to prove the benefits of new regulations outweigh the costs before introducing them?

It sounds like a simple question with an obvious answer. But the role of cost-benefit analysis in writing federal regulations (and even laws) is shaping up to be one of the biggest battles between the Obama administration and business groups in 2012.

Most commentators and oil analysts are convinced a further rise in prices is inevitable in the next few years as emerging market consumption grows and supplies increasingly come from more costly and technically challenging sources such as ultra-deepwater.

While there are disagreements about the extent and the timing of price changes, there is a remarkable degree of consensus about the direction: up. But the roller-coaster experience of the last five years should have taught forecasters to be much more cautious about extrapolating trends and assuming the future direction is obvious.

Price forecasts are notoriously unreliable. There are simply too many variables and too much uncertainty about the current state of the market let alone how supply and demand will evolve in future. The crucial role of expectations in price formation adds an element to “reflexivity” which is hard for forecasters to anticipate or model accurately.

Britain’s new coalition government likes to remind voters we are all in this together. The phrase is rather glib. But in an important sense savers and borrowers around the world are finding the costs of reckless lending are falling on the innocent and guilty alike.

Few people this century will have experienced what it is like to turn up at their bank and be told they cannot withdraw deposited funds because the bank has “suspended” payments.

Suspension sounds harmless. But before the spread of deposit insurance, the word was enough to strike fear into the hearts of depositors, who risked losing much if not all their life savings, and being made to wait months or years for access to what remained.

- The opinions are the author’s own -

No one doubts BHP Billiton is the smartest, most innovative mining company in the world. It has shaken up a once-sleepy sector and transformed pricing and marketing of raw materials from copper to coal and iron ore.
BHP is the mining sector’s Goldman Sachs. It employs the best minds and campaigns to change practices which have been long-established but which the firm considers outdated in a successful quest to unlock immense value for its shareholders.

According to the firm’s website “At BHP Billiton we’re looking for people who want to grow with us around the globe, take chances and stand out from the crowd. We need people who embrace tomorrow, have vision, love stretching their minds and going far beyond what they thought was achievable.”

But like Goldman, BHP’s success has come at a price. The company is unloved. BHP’s success has bred envy among its competitors. Worse, the company’s aggressiveness has made it a host of enemies among competitors, customers and regulators. Now that backlash is hampering the company’s ambitions to grow.

In a compromise, the Federal Open Market Committee (FOMC) has approved a cautious and conservative second round of quantitative easing (QE2) which may satisfy nobody but should prevent internal splits from widening.

It is designed to provide some marginal stimulus to asset markets and economic recovery without further undermining the confidence of foreign investors.

The best way to characterize the $600 billion bond-buying program implemented over eight months is “QE-lite”. The total is slightly higher than expected, but spread over a slightly longer period. The Fed has done almost exactly what it signaled over the last few weeks — no more (there was no “shock and awe”) and no less.

-The opinions are the author’s own-

California voters on Tuesday rejected a measure to suspend the state’s innovative climate change law. But the state’s emission trading scheme has been substantially diluted to buy off opposition from energy-intensive industries and allay fears about job losses.

If it is true that “as California goes, so goes the nation”, the past 10 days have confirmed the lack of political support for tough emissions curbs.

The survival of California’s cap-and-trade scheme has kept alive hopes for enacting a patchwork of state and regional schemes in the absence of a federal program. Supporters hope establishing even a diluted system will lay the groundwork for a program that can be toughened as the economy improves.

- The opinions expressed are the author’s own-

FOMC meetings are usually a strange combination of formality and easy-going familiarity but levity may be in short supply this week. The Fed’s institutional credibility is on the line, and the normal decorum that characterizes relations among committee members has become increasingly strained over the summer.

Divisions between proponents and opponents of a second round of quantitative easing (QE2) have been on display as never before. It is not clear what members will say to one another to fill two days since all the arguments have already been rehearsed in detail and in public over the last six weeks.

In a thinly veiled swipe at his colleagues, Kansas City Fed President Thomas Hoenig has stumped around his patch on the Great Plains denouncing QE as a “dangerous gamble” and “a bargain with the devil”.

-The views expressed are the author’s own-

A warning by an International Energy Agency (IEA) analyst this week that quantitative easing (QE) risked inflating nominal commodity prices and derailing the recovery drew a withering response from Nobel Economics Laureate Paul Krugman, who labelled the unfortunate analyst the “worst economist in the world”.

According to New York Times columnist Krugman “Higher commodity prices will hurt the recovery only if they rise in real terms. And they’ll only rise in terms if QE succeeds in raising real demand. And this will happen only if, yes, QE2 is successful in helping economic recovery”.

Krugman’s criticism is unfair. There are clear links between QE and investor appetite for commodity derivatives and physical stocks (via the Federal Reserve’s “portfolio balance” effect), and from investors’ holdings of derivatives and physical inventories to cash prices (given the relatively inelastic supply and demand for raw materials in the short term).

“Market participants should not direct policy,” Kansas City Fed President Thomas Hoenig warned listeners at a town hall meeting in Lincoln, Nebraska, back in August. Unfortunately that is precisely what is now happening.

Hoenig noted that Wall Street’s clamour for cheap money was not disinterested: “Of course the market wants zero rates to continue indefinitely … they are earning a guaranteed return on free money from the Fed by lending it back to the government through securities purchases.”

Now the same pressure groups want the Fed to launch a second round of asset purchases so they can sell U.S. Treasury bonds to the central bank (in effect back to the federal government) at inflated prices.