On Bourbon, Oil Price, and Innovation

Image by Yarek Waszul

Image by Yarek Waszul

An interesting article in today’s Times about two “liquid” industries, oil and bourbon. The two industries, unlike as they are, have one thing in common: long lead times from the initial investment to finished production. Good bourbon takes more than 10 years to age, and so does the oil exploration and production. The article argues that the bourbon is in the same state as the oil was 10 years ago: demand exceeding supply and prices are rising. In the oil industry rising prices prompted more than double investment in exploration, and now that the supply has grown, prices have dropped. Bourbon is taking a different approach:

“We’ve been adamant about not raising our prices to our distributors much beyond the cost of goods and inflation,” Mr. Brown said. “The reason for that is very simple. We’re in this business for the long term. Just because bourbon is hot right now doesn’t change our way of thinking to say let’s take advantage of the situation.”

Buffalo Trace and other bourbon makers try to carefully allocate their product to distributors around the country at what is, effectively, slightly below the market-clearing price. A result is headlines like “The Great Whiskey Shortage of 2013.” On the gray market, bottles of 23-year-old Pappy Van Winkle reach four-figure prices.

But the bet the bourbon industry is making is that there is more money to be made in the long run by cultivating a new generation of bourbon drinkers among young adults, and by building loyalty among customers in all corners of the United States, and eventually the world.

Clearly, the bourbon guys are concerned about keeping competitors off the market. Had the oil industry followed the same path, I suppose, the todays’ world would have been quite different. Many innovations have been sparked by the high oil prices: Teslas, Leafs, Solar Cities of the world. The “boom bust” cycle, which is not unlike the bullwhip effect, is generally bad for incumbent operations, but in some cases it also provides an opportunity for innovation. Who knows what the next hottest liquor will be?