Hashing out Oregon’s impending marijuana boom

The votes were counted and the people decided: Marijuana is going to be legal in Oregon, the next state to go green.

But that’s not going to be nearly as simple as it sounds.

Weed is still illegal according to the federal government. Some local governments have banned the drug, too. And state governments are in strange and uncharted waters: The legal landscape remains confusing, if not potentially downright dangerous.

Still, after decades of prohibition, reason is beginning to prevail. Oregon police will be free to go after real criminals, stoners need no longer join the ballooning prison system, and the state has a new source of much-needed tax revenue.

You may not be arrested with a bag of pot anymore. But how do you go about buying it, let alone growing it or selling it? At the moment, no one knows for sure.

Each state is like a petri dish with a different market culture growing in it. 

An entirely new market is about to be created in the state of Oregon. The decisions being made right now by regulators in Oregon are going to permanently change the economy in the state. A major new source of tax revenue is being created, but as a brand new market comes into existence, we could see a real estate bubble like during the Dotcom rushes, major changes in interstate trade, and lasting effects in the way other commodities, like alcohol and food, are sold.

Right now, the shift to legalization is raising far more questions than answers—not just for Oregon, but for the burgeoning legal marijuana industry across the U.S.

Will all local industrial space in Oregon literally go to pot? Will the Coast Guard extend drug interdiction patrols to the Columbia River? Will the future of marijuana production look more like the production of beer, tobacco, or wine? Will recreational marijuana customers pursue the microbrews of pot, the Marlboro of pot, the Château Lafite Rothschild of pot, or some combination?

Predicting the combined effects of regulation, production economics, and the retail market’s eventual shape is difficult, to say the least.

Oregon has the potential to be completely different than other states, as its rules are developed independently, and as regulators try to learn from the experiences of other states that have already started the process.

Here’s what the next green boom will look like.

Who makes the rules?

Good question.

In the U.S., the federal government makes the rules above all else. But on marijuana, they’ve ceded control to the states, leaving each state to figure out for themselves how to make their own way work.

The Oregon Liquor Control Commission (OLCC) is in control of licensing and rulemaking for Oregon recreational pot, like the Washington State Liquor Control Board (WSLCB) is in Washington, but unlike the rules in Colorado.

Oregon’s voters passed Measure 91 in November 2014, but few details have been released on exactly how this new commodity market will be allowed to function. Pot is not technically legal in Oregon until July 2015, and the OLCC is not required to begin accepting applications for production and retail sales until January 2016, a curious gap that state lawmakers are currently trying to plug.

Does this mean that medical marijuana is available to everyone?

Colorado was first out the gate because they decided to simply open up their expansive medical marijuana system to recreational sales.

Washington’s pre-existing medical marijuana laws only provided for a much smaller “collective garden” system that didn’t really allow for retail sales.

Oregon’s medical marijuana program is in much better commercial shape than Washington’s, with a number of experienced dispensaries currently serving those who have Oregon Medical Marijuana Program (OMMP) cards.

It is as yet unknown whether Oregon will permit current medical establishments to sell recreationally or what divisioning rules there might be, if any. This is a major unknown at the moment.

Where will legal pot come from?

Marijuana is one of the most regulated, common substances in the United States even when not fully criminalized, considering it is something that 38 percent of Americans have used. More Americans have used pot than own guns.

Unlike guns, cars, prescription drugs, nuclear fuel, and even, say, fighter jets, there is no historic industry for producing, distributing, marketing, and selling marijuana.

It was not simply limited and controlled, but legislated out of legal production completely. At least, it was before Washington and Colorado voted to make recreational use of pot legal in 2013, and Oregon, Alaska, and Washington, D.C., joined them in 2014.

There was, and remains limited systems for, medical marijuana distribution in the 23 states that currently allow some form of medicinal use, but the capitalistic floodgates are now opening.

The production system for a major new cash crop is being born—a cash crop that must be careful cultivated from cloned plants, harvested, processed, tested, and then distributed, whether in plant form or processed into other forms, such as oils.

Will Oregon have an indoor real estate bubble or an outdoor eco-friendly crop?

Denver has become the pot-production capital of Colorado, causing real estate to skyrocket. Rents have more than doubled, and one realtor described the rush to scoop up real estate as equivalent to the Dotcom boom.

This is one of the worst-case scenarios from the new marijuana industry: Destabilization of other markets.

In Colorado, only indoor cultivation is allowed to limit the size of the crop and keep it out of the public eye. Local municipalities and counties can ban the recreational sale of pot, which many did, as in the more conservative city of Colorado Springs, for example.

The combined facts of vertical integration, certain areas closed to sales, indoor growing only, and the unique population concentration of Colorado all contributed to Denver’s sudden population growth.

Given the limited space for indoor cultivation, producers often end up in bidding wars to secure the warehouses they need to meet demand. This has also pushed up residential rents in Denver as well, according to some reports.

In Washington, outdoor cultivation was allowed to reduce the stress on the power grid and to take advantage of the arid but irrigated Columbia Valley in the middle of the state, already famous for its vineyards. And while some municipalities attempted to enact local bans, they have been met by counter-litigation, meaning that most counties are still open to production and sales. While there are production bottlenecks, the property boom that Denver is experiencing has largely been avoided in Washington.

Will recreational marijuana customers pursue the microbrews of pot, the Marlboro of pot, the Château Lafite Rothschild of pot, or some combination? 

It is as yet unknown whether indoor or outdoor cultivation will predominate in Oregon. If all production is forced indoors, there would likely be a real-estate bubble just like in Colorado. The metro Portland area contains 46 percent of the population of Oregon, and indoor production would likely congregate in this area. However, municipal bans like those in Colorado are preempted by the state’s marijuana-legalization law, at least without local measures passed by public vote in future elections.

If indoor production is the law of the land, one thing that Oregon has going for it is huge quantities of cheap electricity from Columbia Valley hydroelectric plants and wind farms, which has already attracted the servers of Google, Facebook, and other large Internet companies. Bringing large indoor grow operations to the small, isolated, economically-depressed towns of Eastern Oregon could be a boom, which could make this style of production more favorable to smaller, typically conservative municipalities.

The indoor pot farm might be the new server farm.

Can’t Oregon just buy pot from Washington, its northern neighbor?

A unique consideration for all new marijuana markets is that, while states have legalized recreational use, the federal government has not.

This contradiction puts pot in an exceedingly strange place. In the effort to run their pilot programs without interference by the feds, states must keep within a few loosely defined guidelines, shaped through announcements by the various federal offices and agencies with skin in the game.

Legal pot must not support other illegal activity or gangs, and all efforts must be taken to prevent use by those under 21 years old. But most importantly, states must prevent diversion: marijuana cannot reach outside these states to others where it is not yet legal. And as such, importing and exporting pot from these states is still illegal.

Colorado, Washington, Oregon, and Alaska are, therefore, legal pot islands.

This is unlike any other agricultural product or even other recreational intoxicants, like alcohol and tobacco, that rely upon interstate trade and national production to make resilient markets. And furthermore, each state has set up their production licensing system completely differently. Each state is like a petri dish with a different market culture growing in it.

In Colorado, the state limited recreational licenses to holders of current medical-marijuana licenses before January 1, 2016. The benefit was that all medical-marijuana licensees were, by regulation, vertically integrated, meaning that those who grew the plant were also those who sold it retail, with mandated tracking from “seed-to-patient.” This allowed for easy tracking of the product, as well as simplified tax collection.

Coloradan legal pot is a hit, and 60 percent of pot consumed in Colorado is now legal. So while the green boom in Denver has caused some disruption, the goal of reducing the black market in Colorado appears to be succeeding.

Out in Washington, however, the story was very different. There were problems almost immediately.

Washington’s plan was to control the pot by capping the number of licenses for retail sale at 334 as well as the total crop that could be produced. But twice that many applications were received. Growers’ quota was slashed from 90,000 square feet to 21,000.

When the first trickle of retail stores opened, with limited licenses granted to growers with limited crops, there was not nearly enough pot to meet demand.

While investment capital was chomping at the bit to get their few stores open and serving customers, there was no place from which to import additional product, so retail prices skyrocketed. In the effort of only opening the market door a crack, Washington created a bottleneck.

When the licensing procedure and cap amounts are more properly balanced, it is a good bet that Washington’s production system will be more resilient due its spread-out, outdoor production. And already, it appears that the initial bottlenecks are being resolved, although slowly. Prices in Vancouver, WA are still reportedly twice as high as medical marijuana sales across the river in Portland, OR.

Unlike Washington’s rules, the current law in Oregon has no limitation on the number of licenses that can be granted. And while there is no word yet on whether there will be a production cap, the bottleneck in Washington was widely tracked in Oregon, and it is likely that Oregon will avoid such a serious problem in getting production up and running, especially with the widespread medical infrastructure already in place.

But production in Oregon and Washington has a new wrinkle that has never been dealt with before: two states with legal recreational pot production will now have a border with each other.

And yet, to stay out of the way of federal law, they will not be allowed to export or import marijuana between the two.

What will be the effect of having two different production markets that cannot balance their supply and demand across the river between them? If prices have huge discrepancies mere miles apart, what will this do to the ability to prevent diversion? Will the federal government station themselves on the Columbia River, interdicting pot going back and forth, but allowing it to remain in either state on its own?

Will you buy pot at the convenience store or at the clinic?

Oregon is flush with cash and talent in the medical marijuana industry already.

If those interests are forced to pick between medical and recreational business, it will certainly have a shaping effect on the market. One could conclude that recreational sales would represent much more of a market than medical sales, and the talent and investment might flow towards retail, accordingly.

So would customers who have medical needs now lose their current retail locations and be forced to switch to what will probably be a more expensive retail establishment? Or would a more orderly and established medical location appeal more to high-paying customers than newcomer retail shops looking to make a quick buck, allowing a de facto subsidy for medical users from retail cash?

It all depends on whether medical clinics can accept recreational customers or not. One could foresee a clean, clinic-like atmosphere attracting certain clientele, over the ambiance of a convenience store. There is a bit of assured bad news: Measure 91 explicitly will not license “mobile” establishments for recreational marijuana sales, so Portland will not add pot food carts to its streets.

History is currently in the making, in various shades of green.

In Washington, alcohol and pot can’t be sold in the same premise, although a number of establishments are challenging this rule. It is notable that while in Washington liquor stores have been privatized, in Oregon they still remain owned by the OLCC, and outside of bars, Oregon liquor sales are highly controlled (limited store hours, many locations closed on Sundays). Is it possible that in Oregon it will be easier for a private party to get a license to sell pot than to sell liquor by the bottle? From a legal perspective, will the Oregon retail pot store be most like a medical marijuana clinic, a bar, a liquor store in Washington, a liquor store in Oregon, or something entirely different?

So far, Oregon seems to be fusing the best of both the Washington and Colorado systems and learning from their mistakes and successes. But there are still many rules to make. Oregon is its own unique environment, and what worked well across the river and in the Rockies will not necessarily work here.

When Oregon does figure out its rules, it will be a new experiment in creating a currently nonexistent market—the third in a series, tied for primacy, but still separate from Alaska’s own simultaneous experiment to the far north. But Oregon’s experiment will certainly not be the last. What will happen when Eastern or Southern states, with an entirely different urban geography to the Western states, begin their own production? What lessons will they learn from the states pioneering the process of building an industry from scratch? What mistakes will they make, and what will they learn?

History is currently in the making, in various shades of green. 

Illustration by Max Fleishman