The law of anticipated consequences…
What is the point of sanctioning Russia? The Law of anticipated consequences states that “most actions are taken to achieve anticipated, rather than unanticipated results”. It is hard to believe that politicians had not anticipated that economic sanctions on Russia are inflationary. Russia is producing approximately 8 million barrel of oil per day. If sanctions on Russia are as successful as sanctions on Iran, Russian production can go down by 50%. Finding another source producing 4 million barrel per day over the next few years will be next to impossible. Even if OPEC has spare capacity of that magnitude, they should prefer price over volume: the Western world is telling them that it wants to shift away from oil, and that demand for oil is about to peak. Historically, OPEC was balancing the market at a price which discouraged competition. Now that oil producers are pressured by shareholders and governments to limit investments into the oil business and increase payouts, OPEC can enjoy a period of exceptional profitability. It is hard to say how high the price of oil can go, because demand for transportation fuel is inelastic in the short term.
What was the real reason for economic sanctions? Many political analysts believe that sanctions can be effective only if there is a strong political opposition in the targeted country. Such opposition, the theory goes, could get together with the targeted businessmen and force the government to change course. There is no organized political opposition in Russia, therefore politicians could have expected that sanctions on Russia would not be effective.
I think that the politicians decided to kill a few birds with one stone: jack up energy prices to accelerate the buildout of green infrastructure, demonstrate solidarity with Ukraine, and show the Russian government their displeasure with its aggressive behavior. If the main goal of sanctions is to accelerate spending on green projects, it might work very well in a period of high prices for oil and gas. It is much easier to show that windfarms and solar installations make economic sense when oil is $150 per barrel rather than when oil is $65 per barrel. Will Chinese solar panel manufactures be sanctioned if China invades Taiwan? Probably not…
What should we expect in the future? I think we should expect a period of high prices for energy and most commodities. Will the European consumer revolt in the voting booth? Lately Europe has been pursuing unorthodox policies, for example negative rates, when borrowers are paid to borrow. May be a clever combination of windfall taxes and energy subsidies will allow consumers of green electricity to be paid for consumption? I am skeptical, but I did not believe that negative interest rates will last for too long either…
Green stocks.
Given the above consideration, I am following a number quality Green/ESG stocks.
Kingspan Group, PLC. (KRX) The company is an Irish manufacturer of insulated panels used in commercial/non-residential construction and insulated boards used in construction and renovation. The stock is a little pricey, like most quality stocks with Green/ESG credentials, trading at 20x forward PE. The company is offering a good mix of cyclical and structural growth and has a record of success in integrating acquisitions. CEO is a member of the founding family, which owns approximately 15% of the company.