Why Legal Pot Will Be Scarce and Expensive

Slow licensing, high taxes, local restrictions, and a production cap will keep Washington's black market alive.

Washington's state-licensed pot stores are expected to start opening next week, but they won't have much to sell. A slow state licensing process for marijuana producers, combined with the difficulty of obtaining local approval for grow operations, will result in shortages that are apt to be more severe than those seen in Colorado after recreational sales began there in January. The result could be prices almost twice as high as those charged by medical marijuana dispensaries and black-market dealers.

The Washington State Liquor Control Board (LCB) plans to award 20 or so retail licenses on July 7, meaning the first stores could open as soon as July 8. Eventually there are supposed to be 334 outlets across the state, although that plan looks doubtful in light of temporary or permanent bans by about 90 local governments. Meanwhile, as of last Tuesday, the LCB has awarded just 62 marijuana production licenses; more than 2,500 applications from would-be growers are still pending.

Scott O'Neil, who expects to receive a retail license on July 7 and open a pot store in Spokane the next day, knows where his supply will come from. He has a contract to buy marijuana from his friend and former employer Sean Green, a medical marijuana supplier who received Washington's very first cannabis cultivation license back in March. Green's grow operation is located in the same building as O'Neil's store, which will do business under Green's Kouchlock Productions brand. But not every retailer will be lucky enough to have such a close relationship with a grower who is already harvesting marijuana. "There will be high demand and only a handful of people growing," O'Neil says. "It's going to take at least a year to sort it out, get everybody up and running."

In addition to shortages, pot store customers will face taxes that are projected to make retail prices about 60 percent higher than they would otherwise be. Add to those factors the costs of establishing businesses that comply with state and local regulations, and the upshot, as I explain in my recent Reason cover story about legalization in Washington, is that prices for legal pot will be substantially higher than current black-market prices.

How much higher? Seattle Post-Intelligencer reporter Jake Ellison, based on interviews with growers and retailers, estimates that "prices per gram [after taxes] will range from $15 to $25 (with some higher spikes and brief lows, possibly at $12 a gram)." Assuming a 30 percent discount for buying an entire ounce (which seems reasonable, based on prices charged by stores in Colorado), that range amounts to something like $300 to $500 per ounce. "Our products are all top shelf, and we are asking $2,800 per pound," one grower told Ellison. "We are asking the retailers we work with to cap their price at $420 per ounce to consumers. We are avoiding the temptation of price gouging."

Even $420 per ounce is pretty pricey compared to the black market. The Price of Weed website, which collects data from cannabis buyers around the country, is currently reporting an average price of about $232 per ounce for high-quality marijuana in Washington. Looking at neighboring states, prices are a bit lower in Oregon ($209) and a bit higher in Montana and Idaho ($268 and $276, respectively). Another point of comparison: Denver dispensaries currently are charging medical customers around $10 per gram, 50 percent less than the low end of Ellison's range. Recreational customers pay more than that, but often less than $15 after taxes. Seattle dispensaries catering to patients charge $8 to $15 per gram.

Six months ago, recreational stores in Colorado, which also had serious supply problems, were selling an eighth of an ounce for as much as $70, three times what dispensaries were charging patients. Prices have settled down since then but remain substantially higher than medical or black-market prices. Kayvan Khalatbari, co-owner of Denver Relief, a medical grower and dispensary that will start serving recreational consumers next week, says after-tax prices in that market average $50 to $60 per eighth. He expects those prices to plummet by next year, however, as growers ramp up production and new suppliers enter the market.

"I would not be surprised, given the flood that's going to happen, if we see $10 and $15 eighths by early next year," Khalatbari says. "I would believe that. I would see ounces being sold for $50. I truly see that happening, because there is going to be so much competition [and] people are becoming so efficient in their production. They're automating much more. We're seeing best practices settle in. There's less risk in operating because people are operating at a higher level….I think we're going to become a very efficient industry very quickly. We're going to see competition, and we're going to see prices hit rock bottom early next year." At that point, he says, the black market will dwindle away.

Something similar could happen in Washington, but it will take considerably longer given the state's slower start, higher taxes, local restrictions, and cap on production, which is currently set at what the state estimates to be 25 percent of the market. Last February, when the LCB was saying pot stores would open this month, the Washington State Economic and Revenue Forecast Council, an independent agency charged with projecting tax revenue, deemed that expectation unrealistic. "Although LCB has indicated that it expects retail sales to start in June 2014," the council said, "local moratoria on cannabis businesses and other production uncertainties have the potential to impact the timing and amount of cannabis produced and sold. As a result, we have assumed retail sales will start in June 2015." Current estimates put marijuana tax revenue during the four years beginning in July 2015 at $586 million, 69 percent less than projected in 2012.

"The problem with the Washington market is that the local zoning issues have not been settled like they were in Colorado," says John Davis, who operates two dispensaries in Seattle. "So what are these retail outlets going to sell? I would say it's reasonable to believe that the shortage problems will be much, much greater than in Colorado."

Philip Dawdy, communications director at the Washington Cannabis Association, which represents medical suppliers, thinks state-licensed pot shops will have trouble competing with black-market dealers. "The market, to really work and to really capture that 25 percent, will need to have consistent supply and quality supply," says Dawdy, who has applied for a production license. "If you put up enough barriers for consumers, it discourages a certain percentage of them and sends them to another market. I think we're going to see that here. I think you'll see a lot of people in the beginning go to the stores just for the novelty of it. But at a certain point they're gonna say, 'Why the heck am I paying $20 a gram when Jimmy the pot dealer's gonna sell it to me for $13 a gram?' I think we're going to continue to have a black market for several years. I know pot dealers in my neighborhood in Seattle. They've all told me they're not worried a bit."

This article originally appeared at Forbes.