This rare gas is running out – and that spells opportunity

The world faces shortages of many important commodities.Quality arable land, swanky London property, crude oil, and even wine all feature on the list of goods in short supply, depending on which reports you read.

Well, here's another to add to the list: helium.

Worldwide stocks of the gas are running out. And unfortunately, this isn't just a problem for balloon vendors and people who enjoy comedy squeaky voices.

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The main users of helium are the MRI scanners used in hospitals to diagnose ailments, and at airport security to check luggage. Those are both growth industries, which means that the need for helium isn't likely to drop off in the near future.

Rising demand plus falling supply usually spells investment opportunity. So how can you profit from this?

What makes helium special

But it also has a very low boiling point. That makes it a very powerful cooling agent, used in sensitive electronic equipment and superconductors.

And it's chemically inert too - it doesn't react with other chemicals to form new compounds. In practical terms this means it can be used to improve safety and stability in welding and rocket fuel systems, where the risk of fires and explosions is high.

Trouble is, while these properties make it useful, they also mean it is very rare. Most helium simply floats off into space. The only way to get hold of it is to tap into pockets that have been trapped underground.

But while some natural gas wells contain helium, it is very expensive to separate it out. Indeed, up until the 1960s, the process was so complex that the US government was the only major helium producer on the planet, for use in weather and military balloons.

The US built up large stockpiles of the gas, but controlled supply. This kept helium prices high, which in turn encouraged private producers to start entering the market.

However, as time wore on, the idea of selling the helium to raise funds proved too attractive. Getting the government out of the helium business was also seen as a sensible thing. So in 1996, the US government decided to release its helium reserves on to the global market.

What's ironic is that while this helium dumping was meant to reduce the government's role in the business, it had the precisely opposite effect.

Predictably enough, plans by the US to dump a load of helium on the market drove the price down. That discouraged private firms from doing any exploration of their own.

So the US government gradually came to dominate ever more of the global market a third of the helium consumed globally is purchased from the US government (via the Bureau of Land Management). The fact that helium was cheap also led to a lot of waste people weren't careful about how they used it.

Forget the debt ceiling only helium unites US politicians

So US politicians despite all their disputes over the debt ceiling managed to agree this year to slow down the pace of sales. The new deal means that instead of the stockpiles being fully depleted by 2015, supplies will be drawn out into the next decade, preventing a sudden price spike.

But this won't solve the underlying problem - the lack of new production from the private sector. While a few facilities are starting to appear in Russia and Qatar, it will take a long time for them to meet the gap in supply left by the retreating US government.

Even the shale boom won't help. Traditional methods of extracting natural gas usually produce a small amount of helium as a by-product. However, the structure of the shale rock (and the fracking process) naturally filters out the helium.

As a result it seems inevitable that prices will rise. Indeed, while helium cost $40 per thousand cubic feet in 2000, it has since soared to around $160.

Some users are so concerned that they are investing in equipment that can recycle helium. However, such systems don't come cheap, requiring large upfront investment, and are primarily designed for university laboratories.

Profiting from the helium shortage and the shale boom

Air Products & Chemicals

NYSE: APD

Air Products has recently announced a joint venture with the energy company Kinder Morgan to extract helium as a by-product of the conventionally drilled Perriman Basin in West Texas. In the medium term, this single source could replace as much as 15% of the US government's sales.

Since the production of industrial gases is extremely energy intensive, and a large part of Air Products' business is located in the US, it should also benefit from the shale boom, in the form of cheap US energy. I've also looked at other ways to benefit from shale gas. If you're not already a subscriber, subscribe to MoneyWeek magazine.

Or if you want to know more about how Britain could follow America's shale boom, have a look at the latest report from my colleague David Stevenson at the Fleet Street Letter.

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