Predicting the black market in e-cigarettes

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Predicting the black market in e-cigarettes

http://antithrlies.com/2014/07/04/predicting-the-black-market-in-e-cigarettes/

Posted on 4 July 2014 by Carl V Phillips
by Carl V Phillips

The anti-tobacco movement is fundamentally dishonest and unethical, and it is also led by minimally-skilled people who isolate themselves in an echo chamber that avoids scientific review. As a result, it is frequently difficult to determine whether one of their false scientific claims is an intentional lie or blatant ignorance. Most of their epidemiologic claims seem to fall into the former category. But most of their economics-related lies seem to stem from an utter failure to understand even first-semester level economics. Snowdon and I (mostly at EP-ology including a few days ago, but also on the present blog) have documented this extensively.

One of their fundamental failures in this area is the apparent belief that — contrary to all we know from the results of the Drug War, to say nothing of all other observations of supply and demand — that bans will eliminate supply even when there is huge demand. One critical appearance of this ignorance relates to the current U.S. FDA draft regulation of e-cigarettes. FDA has clearly made no attempt to consider what the real — as opposed to fantasy idealized — results of their proposed e-cigarette ban would be. It is not difficult to understand that there will be a continuing market in e-cigarettes — mostly not actually “black” despite the shorthand in the title.

As has been extensively documented by CASAA (based on what is effectively an out-and-out admission of the point by FDA), the proposed regulations would allow for FDA approval of only a dozen or two of e-cigarette products now on the market, which are probably on the order of 100,000. The potentially approved products are cigalikes made by the largest manufacturers, which are dispreferred by experienced vapers and are not as effective at promoting smoking cessation as higher-quality products.

So what happens to the others? FDA seems to want their ANTZ friends to believe they will disappear, though I am guessing that FDA knows better. But they do not seem to have really thought it through, or they do not care about the real consequences.

The standard ANTZ lie is that the market for tobacco products is created by the suppliers and not by demand. For anyone not living in that bizarro fantasy world, it should be apparent that continuing demand will result in continuing supply. The reality is that the products that exist now will continue to exist, and will result in a market that is far less regulated and safe than the current situation.

The nature of the continuing market

It is not difficult to predict the response to the proposed de facto ban by manufacturers and consumers. There are many smokers who will be denied the opportunity to quit due to the restriction in the open and legal market for higher-quality e-cigarettes. But there are hundreds of thousands of dedicated vapers already using refillable component systems in the USA, and there will be many more before the de facto ban takes effect after more than two years. Some will switch to the handful of cigalike products that can pass the paperwork burdens to get FDA approval (assuming FDA grants any approvals), but many – probably most – will not be interested in this lower-quality and more expensive option. They will have no difficulty in continuing to do what they do now, because this huge demand will continue to attract supply.

The continuing market for e-cigarettes in the USA, under the proposed regulations, will contrast with the minimal markets for banned or almost-banned low-risk tobacco products, such as snus in the European Union (EU). In the case of snus in the EU, the product is easily available for consumers who seek it, but the ban does appear to have reduced awareness and has kept this low-risk alternative from becoming popular among subpopulations who did not use it traditionally. By contrast, e-cigarettes are already very popular in the USA, there is an established strong social network associated with them, and there is near universal awareness of them. Moreover, because the proposed regulation is a backdoor ban that only regulates sales, and not a full-on ban that criminalizes acquisition, usage, or manufacture (absent sales), there will be no stigma or legal exposure in continuing to use and discuss the products openly.

 

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CTP (FDA’s Center for Tobacco Products) statements have made it clear that they do not believe FDA has the authority to regulate, under the TCA, e-cigarette liquids that do not contain nicotine (or other chemicals derived from tobacco plants). We concur with this reading. Thus, current manufacturers of the liquid will be able to continue to make and market zero-nicotine versions of their current products. Unless additional legislation is passed to enable FDA to regulate these products, perhaps as foods, FDA appears to have no authority to limit the variety of available flavors (which is good for the consumer) nor to regulate what ingredients can be used (which is potentially bad for the consumer if it is ever discovered that particular ingredients create a substantial health risk). Given that many manufacturers have acquired industry-specific skills and infrastructure, and have developed brand equity in the sector, it is inevitable that many will stay in the market on this basis, though most will be forced to dramatically downsize because they can no longer openly sell nicotine-containing liquid, the majority of their business.

CTP has been rather more ambiguous about whether they will attempt to assert authority over e-cigarette hardware that is sold independently of the liquid. But it is clear that hardware manufacturers will have the easy option, given that zero-nicotine liquid will continue to be legally sold: They can continue to market their products, duly labeling them as “not for use with nicotine-containing liquids.” It seems unlikely that, should CTP attempt to exert jurisdiction over such products when they do not have authority over nicotine-free liquid, the courts will uphold it. It seems unlikely that such sales could be prevented on the basis that some of the hardware is being diverted to use with nicotine-containing liquid (compare: the inability to ban products which were clearly designed to smoke cannabis because they were sold under the transparent fiction of being tobacco smoking devices). Moreover, ironically, since most e-cigarette hardware components can be used for vaping increasingly-legal cannabis, this will create an additional safe-haven for hardware sales, and also ensures that the powerful cannabis lobby will join vapers in opposing new laws that restrict hardware sales.

Thus, the components of open-system e-cigarettes will continue to be legally sold outside the jurisdiction of FDA. It is difficult to imagine that consumers will be criminalized for repurposing the hardware for the legal act of vaping nicotine, and such a law would be unenforceable in any case, for several obvious reasons.

That leaves only the nicotine solution, which can easily be supplied in any of several different ways.

The first option is the inevitable black market for the same e-cigarette liquid varieties that are available now. Given the large number of tiny domestic manufacturers that exist and have local distribution networks, and the social networking surrounding vaping, there is no doubt that this will exist. It would be easy for such small manufacturers to stockpile years’ worth of nicotine, and probably not much harder to continue to untraceably acquire it. Foreign manufacturers — existing or new — who are not seeking FDA approvals and are in jurisdictions where the U.S. FDA has little influence would have no incentive to not ship to US consumers. The products are sufficiently inexpensive that the risk of Customs seizure would be tolerable. The supply chain for black market e-cigarette liquid would be no harder than that for popular banned drugs, products which are easily available to consumers who seek them, and distribution would be similar. The risks involved would be less than for suppliers of those other products, given that possession would be legal and the draconian anti-drug punishments would be unlikely to be replicated for e-cigarette liquid. However, there would still be some risk, and thus prices would rise to compensate suppliers for this.

The second possibility involves legal sales of an approved liquid. It is possible that FDA would never approve any refillable e-cigarette. If such approval were granted, however, the approved liquid would be available for repurposing. It would almost certainly be offered in an unflavored variety and this would create a secondary market in flavored (zero-nicotine) liquids that were designed to be mixed with it to achieve the desired flavor level in the mixture. For those who did not want to dilute the nicotine concentration of the approved product, concentrated flavor drops or do-it-yourself flavor mixing would be options.

A hybrid version of these two market possibilities is a black market in unflavored nicotine solution, with nicotine concentrations that are optimized for easy mixing with legal zero-nicotine liquids. The equivalent products are already sold for do-it-yourself mixing.

The third method, which would be impossible to stop, is do-it-yourself nicotinization of the liquid or full-on do-it-yourself manufacture. A year’s supply of nicotine for a typical vapor is in the order of 10 g., which is about two teaspoons. This would be trivial to distribute and stockpile, or smuggle if necessary. Smuggling would apparently not be necessary, given that pure nicotine is not a controlled substance, and does not appear to fall under the current proposed regulation since it is unsuitable for vaping without further processing. While nicotine manufacturers are unlikely to enter this business, it would be trivial for some of their corporate customers to stock up and divert the nicotine to the consumer market. If nicotine remains legal, the logistics are simpler, but a ban would be a fairly minor obstacle. While the process for mixing the highest-quality (and safest) e-cigarette liquid requires artistry and engineering skill, mixing e-cigarette liquid can be done at home by most anyone with easily-available ingredients. It already occurs to a sufficient extent to provide proof of concept.

 

[VaporJoe]

Yes its called the Vaping Underground

 

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Consequences of the new market for e-cigarette products

The result of the de facto ban of the legal e-cigarette market will be less regulation and greater risk than currently exists, and would also prevent many of the benefits that might come from good and proper regulation.

First, to take the most obvious concern, the do-it-yourself manufacture or mixing will create more direct and immediate health risks. Thousands of vapers possessing and handling pure nicotine would dramatically increase the accidental poisoning hazard posed by e-cigarettes. Despite the engineered hype about poisonings that exists now, the current risk is very close to zero due to the very low toxicity of e-cigarette liquid. That would not be the case for pure nicotine. There is even interest in do-it-yourself extraction of nicotine from tobacco leaf. Although most consumers who are toying with this idea will abandon it when they discover how difficult it is and how easy it is to access the black market, any attempts will further increase the health risks caused by the regulation.

As is typical for prohibitions of drugs that people choose to use, the do-it-yourself market presents far greater risks of accidental overdose than a legal market would. There is no formal quality control and the risk of badly erring in proportions is much greater due to the small quantities and lack of experience. Once again, one of the frequently hyped engineered concerns — that nicotine concentrations sometimes vary from what the consumer intends to use — would be dramatically exacerbated by the supposed solution. Moreover, with tens of thousands of people mixing their own liquids, it is inevitable that some will try adding ingredients that no reputable manufacturer would use, and that would increase health risks.

Second, the existing de facto regulatory system, which has proven quite effective so far, would be hugely eroded. The current rhetoric about “there is no regulation” or that the e-cigarette market is “the wild west” (which is also historically inaccurate) ignores not only the many command-and-control regulations that already do apply to these products, but also the fact that regulation of consumer goods comes substantially from brand equity and, in the USA, from the civil liability system. The benefits of these regulations would be dramatically reduced in the world that would be created by the proposed regulations.

For obvious reasons, full-on black marketeers gain limited benefit from building brand equity. They have obvious incentives to not use consistent branding, and the value of their reputation is capped by their need to stay small enough to escape serious scrutiny. They are almost impossible to sue should something go wrong. But even manufacturers of hardware or liquid products for the legal shadow repurposing market will lose some of these de facto regulations for similar reasons.

Even as the FDA approval process favors only the largest companies, the evolving market will almost certainly favor very small domestic producers over the existing medium-sized domestic manufacturers that tend to have better quality-control. Existing medium-sized e-cigarette liquid companies who stay in operation will lose the large part of their business that is nicotine-containing liquids, which will force downsizing and cost cutting. The regulations will create a climate of risk for manufacturers — obviously for the black marketeers, but also for the shadow markets where there will be constant fear of new regulation or government enforcement actions, which are still financially devastating even when they are unlawful. This will discourage investment in the physical facilities and brand equity that lead to higher-quality and safer products. There will also be a reasonable fear that greater size will attract more scrutiny.

Thus, most of the de facto regulatory protection that is now in place will be lost, with no apparent offsetting benefit. Manufacturers that are currently motivated and able to produce higher-quality products will be disadvantaged compared to fly-by-night producers who can simply disappear if something goes wrong. The market for manufacture and distribution will favor those with high risk-tolerance or financial desperation, as with the illicit drug market, rather than more desirable skills and traits.

Finally, the establishment of a thriving black and shadow market will likely make future regulation more difficult and less effective. A time may come when a beneficial regulatory regime — one that is designed to benefit consumers by improving quality rather than hurt them by removing options, as the present proposal does — is enabled and enacted. But by then, regulated legal manufacturers will have to compete against an established black and shadow market which consumers have become accustomed to using, and which will probably be able to maintain lower prices by avoiding taxes and regulatory paperwork.

For example, if it is ever discovered that particular flavoring ingredients cause needless substantial health risk, a sensible regulatory system could forbid those ingredients in all e-cigarette liquid (with or without nicotine). But if such regulation is attempted after the currently proposed regulation creates a black and shadow market, it is likely that many manufacturers would ignore it. What is worst, if such a discovery were made today, the suppliers who represent the vast majority of sales volume would voluntarily stop using the ingredient because they are respectable companies who care about their customers and their reputations. This effective self- and community-regulation would be severely weakened by the proposed regulations, which would largely replace the reputable companies with a black and shadow market.

To summarize, in just a few years, the market has evolved away from the “wild west” characterization that represents much of the motivation for the proposed regulation, and it continues to evolve in a direction that is good for consumers and public health. The only apparent way to stop such evolution, and thus to bring about the out-of-control market that exists in the politicized mythology, is to impose a regulation like the current proposal.

So, what will you do?

For those readers who are dedicated vapers, it is interesting to ask yourself what you would do in the world created by these regulations:

1. Use the regulated mass-market cigalike products that FDA approves?
2. Vape zero-nicotine liquid?
3. Return to smoking?
4. Switch to another nicotine source like snus, and perhaps continue to vape zero-nicotine liquid?
5. Continue to buy hardware and buy the liquid you want on the black market?
6. Continue to buy hardware and try to make your own liquid, by adding pure nicotine to zero-nicotine liquid, or from scratch?

[P.S. It turns out the date this was posted was coincidence; it was a point in an ongoing process that just happened to be reached today. But it is remarkably fitting. Happy Independence Day, everyone.]

 

[Vapecloud]

Yes its called the Vaping Underground

I hope they don't throw people in prison for twenty years for having nicotine. If it ever comes to that, I'll quit cold turkey and screw them all. Big tobacco won't get another cent from me even if they are the only one's selling ecigs. I already know they don't give a shit about me and the feeling is mutual.

 

[Zamazam]

If it comes down to the black market, I'll grow my own tobacco and extract the nicotine myself. There is no way in hell big tobacco is getting another cent from me, nor will I pay exorbitant taxes on a product that got me off of cigarettes.

 

[Roger Schaeffer]

If its a black market for E Liquid and nicotine solution it will be similar to buying batteries from FastTech-You will not have much of and idea what you are buying. Lots of people died during Prohibition from poisonous bootleg Alcohol

 

[MD_Boater]

If its a black market for E Liquid and nicotine solution it will be similar to buying batteries from FastTech-You will not have much of and idea what you are buying. Lots of people died during Prohibition from poisonous bootleg Alcohol

And it will be the FDA's fault if people die from bootleg eLiquid.

There have been no deaths so far, but you are right, there will be under the black market scenario. Particularly when amateurs get their hands on pure nic...

 

[VapedCrusader]

I don't see the FDA outright banning e-cigs.. especially with the tobacco companies already marketing their own brands of e-cigs.. but they deff want to milk as much tax money as they can - which means a TON of B&M shops will go out of business due to the taxes and not being able to turn a profit.

I remember when MA was looking to pass a 90% tax on e-cig related products.. my friend was already expecting that he would have to close his business or move strictly to online sales because he would have to charge almost 40$ for a 30ml of juice.. it was ridiculous.

I could live with a 10% tax.. but i mean 90% - seriously? Fucking vultures..

 

[Smoky Blue]

i see it like this:

those that make juice, it will get harder to get your needs taken care of..
those that have shops, more inspections, city limitations, and costly fees to run a business..
they will outlaw anything that requires a person to add juice into their vaporizer..
only sealed for our protection carts atties and drippers will be a thing of the past..

thank goodness i have a hook up and will never run out of nic..
i also like my herbal extractions a bit too much, but.. at the same time, i wonder how this will all effect the flavor companies..

 

[Whiskey]

I hope they don't throw people in prison for twenty years for having nicotine. If it ever comes to that, I'll quit cold turkey and screw them all. Big tobacco won't get another cent from me even if they are the only one's selling ecigs. I already know they don't give a shit about me and the feeling is mutual.

I'm not gonna quit vaping at all I am scaling down my nic slowly and 0 nic juice is what I will be using eventually, plus I have some stored away fior that rainy day. I have too many toys to play with, Quit vaping??? Hell no sir.

 

[2ndInCommand]

I got a small freezer from.wally world, figured out how much nic I would need to last till the lights went out, doubled that number and started stocking up. Gonna look for a black Friday sale to top off the reserves and I should be set for the next decade or 5. I think we may not be able to get a million flavors like now due to downward trend in demand, but we should be able to get somethings. Also I tend to stick.with Russians and kayfuns for attys for a parts availability reason or I can cannibalize if need be (I have a few clones I never use just for this reason and a ton of spare o rings and the like) Next step -gonna get some chips and 510s and learn to mod 1stinCommand thinks I'm nuts, but I explain that this is me keeping the man down for a change!

 

[Bliss Doubt]

I got a small freezer from.wally world, figured out how much nic I would need to last till the lights went out, doubled that number and started stocking up. Gonna look for a black Friday sale to top off the reserves and I should be set for the next decade or 5. I think we may not be able to get a million flavors like now due to downward trend in demand, but we should be able to get somethings. Also I tend to stick.with Russians and kayfuns for attys for a parts availability reason or I can cannibalize if need be (I have a few clones I never use just for this reason and a ton of spare o rings and the like) Next step -gonna get some chips and 510s and learn to mod 1stinCommand thinks I'm nuts, but I explain that this is me keeping the man down for a change!

Are you buying pure medical grade nicotine, or a mix of nic with pg/vg, and the next question will be, how long does the integrity of the nicotine last in the freezer?

 

[Delion]

If its a black market for E Liquid and nicotine solution it will be similar to buying batteries from FastTech-You will not have much of and idea what you are buying. Lots of people died during Prohibition from poisonous bootleg Alcohol

Lets not forget that the Government itself has admitted to poisoning alot of the bootleg booze back in those days as well!

 

[aikanae]

Are you buying pure medical grade nicotine, or a mix of nic with pg/vg, and the next question will be, how long does the integrity of the nicotine last in the freezer?

I know there's been some tested at 4 years and it's been fine. VG or PG makes little difference. It was stored in glass though.