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Oregon is producing twice as much cannabis as people are using, according to a new study from the Oregon Liquor Control Commission. And Oregon has been overproducing marijuana for a while — leaving more than six years' worth of supply sitting on shelves and at farms.

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On top of that, the Oregon secretary of state's office just released an audit saying Oregon's system for regulating marijuana needs to be strengthened.

Inventory of supply of THC, the active ingredient of marijuana, by month. Oregon Liquor Control Commission

The oversupply of cannabis has driven down prices. Since recreational cannabis was legalized three years ago, prices have dropped from $10 a gram to less than $5 a gram.

That may be good for consumers, but the worry is weak regulations plus a massive oversupply will fuel the black market.

Imagine the farmer who spent all year growing her crop, only to learn it’s not worth much. That is, it’s not worth much in Oregon. There’s a big temptation to put the oversupply in the back of a truck, drive south to California or east to Idaho, and sell it to someone on a street corner.

But the federal government has made it very clear that a thriving black market and illegal exports are likely to lead to a federal crackdown.

The Trump administration has rescinded earlier guidance from 2013 that directed prosecutors not to prioritize federal enforcement over marijuana laws in states where it had been legalized. Last May, U.S. Attorney for Oregon Billy Williams committed to reining in the state's cannabis black market.

“[M]ake no mistake about it, we’re going to do something,” Williams said at the time.

The new OLCC report is the first clear and comprehensive documentation of the state's oversupplied cannabis market.

“Preventing diversion is imperative to ensure federal authorities maintain confidence in Oregon’s ability to adequately regulate the use and sale of marijuana,” said Secretary of State Dennis Richardson.

The OLCC report is required by Oregon law and is meant to inform lawmakers about the health of the recreational cannabis industry.

In its new study on marijuana supply and demand, the OLCC puts forward four possible policy ideas on how lawmakers could respond to the oversupply. The first is to not do anything. The "creative destruction" of a normal market will take over. Many businesses will fail, others will consolidate and, eventually, the market will find an equilibrium between supply and demand.

The U.S. Bureau of Labor estimates 40 percent of all businesses fail within the first four years. Oregon’s marijuana market is three years old.

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The main problem with maintaining the status quo, is that more inspectors are needed to make sure the oversupply of marijuana doesn’t get funneled into the black market.

Graph showing the median retail price of usable marijuana per gram. Oregon Liquor Control Commission

The three other policy suggestions included in the new OLCC report would require some action from legislators — but they have also have pros and cons.

The first idea is to limit canopy sizes. That means restricting the amount of cannabis each license holder can grow. The trouble with that is, farmers could simply buy more licenses and grow more cannabis.

The second suggestion is to increase license fees. The problem with that idea is that up to now, license fees have been such a small part of costs, that to make a big difference, the fees would have to increase a great deal.

Last, OLCC suggests capping the number of licenses or continuing the current moratorium on granting licenses. But that could put the OLCC in the position of picking winners and losers, which is not something agency leaders can be nervous about.

But OLCC executive director Steve Marks said they already do something similar with liquor licenses, but he wants to leave the decision up to lawmakers.

“It would be an interesting place for an agency to be at,” said Marks. “Certainly, if the Legislature wants to make those choices, that would be helpful, because then we could just implement them. But I think because of the need to move fast, that it could fall to us.”

The OLCC report comes on the heels of a marijuana inspection audit, released by Richardson on Wednesday.

It found marijuana inspectors are spread extremely thin. Only 3 percent of retailers have had compliance inspections and only one-third of growers.

“As the market is still developing, agency tracking of Oregon’s marijuana supply and inspections is lacking,” said Richardson. “This increases the risk that marijuana businesses in Oregon will find themselves subject to federal scrutiny.”

An oversupply of marijuana has diven down prices. The worry is weak regulations plus a massive oversupply will fuel the black market. Kristian Foden-Vencil / OPB

In addition to the recreational market, the secretary of state's audit also looked at oversight of medical marijuana. It found government agencies don’t have the authority to put sufficient controls on medical marijuana — such as the "seed-to-sale" tracking or surveillance cameras, at recreational businesses.

The audit also found most medical marijuana isn’t required to be tested. And even when it is tested, the state doesn’t have a good mechanism to verify results.

Advocates are watching Oregon's cannabis industry closely. The Virginia-based Smart Approaches To Marijuana group promptly issued a statement saying “Oregon Utterly Fails to Regulate The Marijuana Market.”

But local market watchers say Oregon set up marijuana sales intentionally to encourage lots of small businesses. The model was Oregon's thriving craft brewing businesses. Only, now that cannabis businesses are up and going, they're victims of their own success.

The OLCC report is clear: There’s just too much cheap marijuana in the state.

Now it’s up to the Legislature to decide how to respond. Empowering agencies to impose more controls could take policy changes and more money. There should be some money available, judging by recent sales figures: As of last November, cannabis generated more than $200 million in Oregon taxes since it was legalized.