Seeking Alpha
Commodities, energy, alternative energy
Profile| Send Message| ()  

field-of-marijuana-dreams

A number of writers and commentators, myself among them, have joked throughout 2009 that budget-crushed California would eventually be forced to tap unconventional sources of revenue. Frankly, I thought offshore oil would be first. Somewhere beyond the analytical error of drill drill drill, which can never produce enough oil to influence the price but would indeed produce the capital many States so desperately need, I’d anticipated that Sacramento would soon find its way to the sunken treasure that lays off its coast. I was wrong. Because it looks like California is going to tap marijuana first.

This is good news because it suggests some in California are ready to deal with their new negotiating partner: reality (Kunstler). It is absolutely rational and level-headed for California to consider legalizing and taxing marijuana. The state is already a leader in the production of medical marijuana, and the climate in many parts of the State is perfect for the crop. An ancillary benefit could be to dampen, if not deaden, some of the drug trafficking incentives which have been in place for over 40 years along California’s border with Mexico. We have reached the point where California needs to develop both marijuana and oil economies.

Although California oil production peaked in 1986, the state is still producing nearly half a million barrels a day. That is 10% of US production. But 80% of that production still comes from onshore. As laid out several times on this blog, I remain a strong advocate of oil drilling off the coast of California–but– for the state to use 100% of those proceeds to build light rail, commuter rail, and high speed rail–in that order. See my October 2008 post: Mission Statement Needed - California Must Lead the Way.

By some estimates marijuana crop production in California accounts for roughly 14 billion in gross sales. That would make marijuana the State's largest single cash crop. One has to believe that current growers would happily trade the costs and risks of concealment for the visibility of taxation. Which would also afford property protection. The current estimate is that taxation could start to yield over 1 billion for the state annually. That’s not going to close either the budget gap of 26 billion, or, make a dent in a 100 billion annual budget. But legalization could bring some efficiencies and perhaps became the basis for an expansion of the marijuana economy.

offshore-oil-and-gas-ca2The motherlode of untapped capital remains in California’s offshore reserves of oil and gas. Speaking very generally, if California were able to quadruple offshore daily oil and gas production from the current 100 kb/day (mboe) to 400 kb/day in a price environment that is plausible to the production period of 100 dollars a barrel–starting in 2012–that would represent gross oil sales of nearly 15 billion a year. The royalties to the State from oil and gas production could be far higher than the tax rate applied to the state’s future marijuana industry.

The potential legalization of marijuana in California should be embraced, if only as a sign of a cultural shift from an era of fantasy-based debt creation to a reality-based era of resource maximization. In order to more firmly reinforce such a paradigm shift in the minds of the electorate, Sacramento would be well advised in addition to track on open websites the transparent utilization of marijuana taxation–say, to fund state health programs. And, in similar fashion with offshore oil and gas royalties that fund rail construction and operation. The taxpayer, in a time of deep cynicism and despair, needs to witness and be a part of positive transformation. My vision, which I have written about continually here, is that light-rail users will travel down Pico Blvd in Los Angeles in trains that bear the following placard: “This rail system 100% funded by offshore oil and gas royalites.”

Given that the current economic collapse-path is unstoppable, with no mitigating economic event or development on the horizon, California should get started now.

Source: California Resource Maximization: Marijuana First, Then Oil