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After the Russian Federation's "special military operation" in Ukraine - which the Federation has variously stated was done in order to "denazify" the region, prevent the development of nuclear weapons and over concerns of biological weapons development allegedly with the backing of the U.S. Department of Defence - there has been significant uncertainty over consequences for energy markets with respect to Western nations' actions. After all, the Federation is the world's third- and fourth-largest producer of crude oil and natural gas respectively and any proposed disruption to the supply chain has significant ramifications.

Yesterday, the U.S. White House announced that an Executive Order has been signed into effect that will ban:

The delineation between crude oil and certain petroleum products is rather interesting. As of 2021, the Federation only accounted for 3.5% of all crude oil imports; Canada, Mexico and Saudi Arabia - in order - hold the lion's share here.

Among the items under "certain petroleum products" is gasoline (or "petrol" as the rest of the world calls it). In this range of products, the Federation accounts for a little over a fifth of all U.S. imports as of 2021.

Both statistics together highlight two important considerations: it could be argued that, ostensibly, a ban on crude oil imports from the Federation has relatively fewer consequences on U.S. consumption. However, it is undeniable that, if gasoline is included under the umbrella term "certain petroleum products", the effect of this will certainly be felt by ordinary U.S. citizens at the gas pump.

The U.S. president has certainly indicated that the latter will be the case:

The decision today is not without costs here at home. Putin's war is already hurting American families at the gas pump... I'm going to do everything I can to minimize Putin's price hikes here at home.

The phrase "Putin's price hike" has become part of the lexicon employed by U.S. officialdom as well as a segment of the TV media commentariat since it was uttered. However, this is only partially true. In previous coverage of Royal Dutch Shell (SHEL) and British Petroleum (BP), it was revealed that the U.S. Department of Energy had publicly estimated OPEC oil production to be greater than what OPEC had clearly stated it would do. Furthermore, it was revealed that the U.S. Energy Information Administration (EIA) - a U.S. government think-tank - rather strangely predicted a flattening of consumption and a fall in prices in 2022, which ran (and continues to run) contrary to market sentiment, empirical data and global statistics. Going by estimates sourced from beyond U.S. government think tanks, the opposite position was certainly deducible for quite some time now, regardless of the Federation's actions in the present.

Another piece of messaging from the U.S. administration ostensibly took aim at U.S. oil majors for the price hike by not increasing domestic production and leaving 9,000 leases "unused". Mike Sommers, the CEO of U.S. energy representation group American Petroleum Institute (API) countered this assertion yesterday:

The fact is that industry is producing at a higher level on existing leases on federal lands than in the last 20 years and these leases take many years to explore, to develop and produce on... Once you lease land there is a whole process that you have to go through. First you have to actually discover whether actually there is oil and gas in that land. Second of all, you have to get a permit to actually develop that land... Right now we actually are developing more leases than we have in two decades so the White House certainly doesn't have their facts straight on this.

Shortly after taking office, the current U.S. administration revoked a key permit for a pipeline between Alberta province in Canada to the state of Nebraska in the U.S. This pipeline would have transported 830,000 barrels of crude oil a day into the U.S. as opposed to the 209,000 barrels of crude oil per day coming in from the Federation. Given that discovery of energy resources is costly as well as uncertain while consumption hasn't flattened, this is a lost opportunity that isn't of the energy industry's making and, as of time of writing, hasn't witnessed a remedy.

While the U.S. isn't a significant recipient of the Federation's crude oil or gas, the rest of Europe and many other parts of the world certainly is. Yesterday's release from the White House stated, "Over 30 countries representing well over half the world's economy have announced sanctions that impose immediate and severe economic costs on Russia...". The European Commission, i.e. the overall coordinating body of a bulk of U.S. allies who could be counted among these 30 countries, has presented a pledge to be undertaken by member countries to reduce their purchases of Federation gas by two-thirds before the end of the year. No member country has confirmed taking up this pledge yet.

Furthermore, key allies United Kingdom, Germany and France are reportedly not joining the energy import ban. Earlier this week, German Chancellor Olaf Scholz made it very clear that his country, Europe's largest consumer of Russian energy, has no plans to join in any ban on the Federation's energy products.

Nonetheless, a number of Western oil majors have moved to shed their involvement with the Federation: BP announced a sale of its Rosneft stake, Exxon (XOM) announced an exit from its Sakhalin venture and Shell has announced its exit from a series of assets and joint ventures. Almost simultaneously, the State in China is reportedly in talks with its oil majors to explore a boost in stakes in energy assets as well as broader cooperation in energy with the Federation.

In repeated punitive actions on the Federation by Western nations at the United Nations, the Republic of India has abstained from joining in (as did the State - despite their mutual geopolitical tensions - as well as the United Arab Emirates, a U.S. ally) and has merely requested that hostilities between the Federation and Ukraine end. The republic is the world's third-largest energy consumer, with over 37% of its annual power capacity driven by renewable sources and one company alone exceeding the total capacity installed by the entire U.S. solar industry in 2019. Despite this, the republic plans to triple its nuclear power generation by the end of the decade while progressively decreasing its reliance on its vast network of thermal power plants. Furthermore, to meet its citizens' growing fuel demands, the republic has repeatedly asked oil-producing nations to increase output for several years now.

While staying above the affray in geopolitical matters in the Western Hemisphere, the republic is part of sustained efforts alongside the U.S., Japan and Australia to keep its backyard - the Indo-Pacific region - free from the State's dominance. The republic's military regularly conducts exercises with these nations and bonhomie with soldiers from NATO's European members as well as the U.S. has grown warmer over the past decade.

Also over the past decade or so, the republic - with the world's largest army, 2nd largest military (entirely volunteer), 3rd largest military spender and 4th most powerful military - has diversified from its dependence on the Federation for armaments in favor of domestic production via cooperation between domestic manufacturers (both state-owned and private) and the world's leading armaments manufacturers, predominantly from France, Israel and the U.S. For instance, the republic operates the world's 2nd largest fleet of Boeing-made P8I submarine hunters after the U.S. However, a large proportion of the republic's war machine remains based on Soviet- or Federation-based technology (albeit with significant indigenous modifications and upgrades). The republic's battle-hardened professional military doesn't play favorites in its acquisition strategy - utility, value proposition and self-reliance determines the choice of source.

At the same time, the republic continues its historically close ties with the Soviet Union by maintaining deep alliances with the Federation and most other post-Soviet republics in the present day. This is particularly crucial on the energy front.

In a development that coincided with talks of sanctions on the Federation, a U.S. government official stated that the republic might attract U.S. sanctions for purchasing the Federation's S-400 missile defense system . It did not escape the republic's media notice that while Turkey had also purchased the system and had incurred sanctions, it remains a NATO member state. Commentators in the republic's TV media also opined that this is a cudgel to press for a renunciation of ties with the Federation. Yesterday, Senator Ted Cruz addressed the relevant Senate Committee by calling any talk on sanctions on India an "extraordinarily foolhardy" move.

The Indian government has remained unmoved to the threat and continued to refuse to do any more against the Federation. Despite the 3rd point stated in the signed Executive Order being advertised in a section of the U.S. media as a huge impediment for foreign companies to conduct business, the republic's Oil and Natural Gas Commission (ONGC) - a predominantly state-owned publicly-traded oil major with a 20%, 26% and 100% stake in the Federation's Sakhalin, Vankorneft and Imperial projects respectively - has stated it has had no difficulties from SWIFT sanctions or any challenges in selling Russian-origin crude oil.

Given the fact pattern presented so far, there are 3 points to summarize the situation:

Firstly, the vast majority of the world might be on board if there were viable alternative sources for energy. Given the close ties between the Federation and the ex-Soviet bloc in Central Asia as well as OPEC's steadfast refusal to massively increase production, the only viable alternative would be non-OPEC nations U.S., Canada and Mexico. This, of course, assumes that the rest of the world won't be wary of this hypothetical alternative coming with "additional conditions". Resource estimates be what they may, the proof is in the pudding. There is no empirical evidence currently that suggests North America alone can be a viable immediate alternative for the energy needs of the majority of the world or that the current administration is working on kickstarting the means to become one.

Secondly, any attempt to cudgel major energy consumers can easily backfire. For instance, recall the earlier statistic that shows that Indian refineries provide 5% of the U.S.' gasoline needs. Furthermore, the Federation's President Mr. Vladimir Putin signed a decree yesterday that includes a ban on "products and/or raw materials according to lists determined by the Russian government" with specifics left unsaid. Any attempt to cudgel an energy consumer can easily result in gasoline supplies ordinarily meant for the U.S. being diverted. Since the end of the Cold War, the U.S. is short of soft power and the means to induce compliance with substantial support.

Thirdly, combining elements of the first and second conclusions and juxtaposing current price trajectories with industry body statements indicate that the U.S. is quite short on refining capabilities vis-à-vis its own energy needs, leave alone the rest of the world. The global outlook on crude oil is dire as it stands: energy traders are betting that prices may pass $200 by the end of this month.

Summarily, the available fact patterns and viable options can compellingly conclude that the effect of the U.S. energy import ban (and any possible counteraction by the Russian Federation) would predominantly be felt by U.S. end users. Most major energy consumers will likely not follow suit with the ban.

Now, one day before the announcement of the ban, senior members of the U.S. administration attending a government event stated, "Our transportation sector has reached a turning point. We are all in the midst of a turning point" and asked the audience to "imagine a future" with electric vehicles. While sales of electric cars are indeed rising, they represent less than 1% of vehicles presently on American roads. While the future would certainly have new vehicle technologies, the present is decidedly fossil fuel-driven.

Given the facts, analyzing trends on both ends of the energy spectrum from an investment perspective would be in order. To do this, two leading ETFs are examined: the Energy Select Sector SPDR Fund (NYSEARCA:XLE ) with over $38 billion in Assets Under Management (AUM) on the "fossil fuel" end and the iShares Global Clean Energy ETF (NASDAQ:ICLN ) with around $5 billion in AUM on the "clean energy" end.

A previous article analyzing the S&P 500's constituents by sector and contributor lent support to the theory that the U.S. equity market (the most overvalued market in the world) is in the midst of a "ratio cool-off" that would bring prices closer to rational levels. A framework similar to the one used in that article is employed to analyze and compare the ETFs' holdings and their ratios - Price to Earnings (PE), Price to Sales (PS) and Price to Book (PB) - in 1-year windows starting from May 2019 till 2021. Subsequently, they're analyzed as of the first week of 2022 (as the ratio cool-off gathered steam) and in the beginning of March.

The ratios are calculated in two formats:

Note: Most data providers put upper and lower bounds on ratios and fiscals. For example, if earnings are too low or PE is too high, they are generally not reported as these aren't considered to hold actionable information. Only reported numbers are considered in these calculations.

The results are as follows:

XLE vs ICLN: Holding Analysis (Source: Created by Sandeep G. Rao using data from Bloomberg)

XLE shows strong consistency in top holdings: 4 out of 6 companies - Chevron (CVX), ConocoPhillips (COP), EOG Resources (EOG), Schlumberger (SLB), Exxon and Phillips 66 (PSX) - account for a little over 50% by "top weight" in the ETF. On the other hand, ICLN has anywhere from 9 to 11 companies amounting to 50% of "top weight", with Enphase (ENPH), Vestas (OTCPK:VWDRY), Plug Power (PLUG) and SolarEdge (SEDG) frequently (but not always) appearing in the Top 5.

The transition of ratios indicates quite a few items of interest. With respect to PE Ratios, valuations of ICLN stocks were much high relative to XLE stocks even in 2019. While both sets of stocks were extensively overvalued in 2021, the differentiation between weighed and weighted-average indicates "equity crowding" in the former wherein some stocks were massively overvalued. This is apparent even in March this year, despite both average and weighted-averages indicating ratios slipping below those observed in H1 2019. In comparison, XLE stocks' average and weighted-average tend to be close together - suggesting relatively more coordinated efficiency in valuation.

With respect to both PS and PB Ratios, XLE stocks' weighted-average tends to be nearly twice the average across the windows, which suggests that the top stocks' prices are somewhat overvalued over the rest in terms of sales and book value. With regard to ICLN, the converse is true, suggesting that the overvaluing sales and book value in this sector is more widespread and the valuation of smaller stocks (by weight) is more speculative.

There was a reckoning of sorts near H1 2021 where the weighted-average PS Ratios of ICLN stocks fell below that of the average - which suggests that corrective actions had been attempted before a "bounce back" at the end of 2021. This disparity has returned in March. As mentioned in the recent article about Tesla's overvaluation, PS Ratios tend to be a strong indicator of stock performance in these times of downturns. Thus, there is a strong chance of "ratio cool-offs" continuing to influence the price of ICLN stocks (and, indeed, most clean energy stocks not included in ICLN).

Now, outside of the likes of Plug Power - which is working on the hydrogen fuel space - most companies in the clean energy space tend to feed the electricity grid. U.S. electricity rates vary by region but the closest proxy to average consumption in the U.S. would be the "Consumer Price Index: US City Electricity Average" which is released with a month's lag or so. With data till the end of 2021, it is observed that ICLN's performance has no stable correlation with electricity costs.

Created by Sandeep G. Rao using data from St. Louis Fed and Yahoo!

On the other hand, oil majors' stock performance traditionally has strong correlations with company earnings over the years (minus, of course, the cost of exploration and infrastructure). Earnings, in turn, are strongly correlated with crude oil prices. The correlation between Brent futures and XLE price performance has been strengthening over the recent years with the current year till date being particularly high.

After a hyperbolic 2020, XLE's monthly change in AUM relative to the same in price show an increasingly strong trend with prices since H1 2021, with March kicking off with a drawdown in AUM as well as price.

Source: Created by Sandeep G. Rao using data from Bloomberg

With respect to XLE, there is very strong lockstep behavior observable, with March kicking off on an upward trajectory after (possibly) a panic-induced drop around the time of Federation military actions in Ukraine.

Source: Created by Sandeep G. Rao using data from Bloomberg

Seasoned energy investors will know that an investment in "fossil fuel" instruments is akin to a "Value" investment - especially given major companies' relative maturity and high operational efficiency. With the bullish outlook on Brent added on top, investing into the likes of XLE (or any other fossil fuel instrument, for that matter) is a fairly easy proposition.

Any argument that doesn't consider positively the inherent potential of clean energy is, of course, inaccurate. Technology improvements have been a steady feature in this sector and the outlook on this sector is a positive in the long run. However, overvalued stocks impute significant volatility and does little to advance the argument for clean energy. Clean energy stocks are, thus, the equivalent of a "Growth" investment once the hyperbolic valuations are disposed of.

However, in these times of high inflation (40-year highs, in fact), investing in "value" has a better chance of securing inflation-busting gains over "growth". Seasoned strategic investors should be wary since the "floor price" for growth stocks currently remains uncertain. Hence, a reasonable investment strategy for a well-rounded investment into energy via ICLN (or any other clean energy instrument, for that matter) would be to either observe, initiate or maintain a modest holding and gradually increase commitment after the floor becomes more apparent.

This article was written by

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I lead research at an ETP issuer that offers daily-rebalanced products in leveraged/unleveraged/inverse/inverse leveraged factors with various stocks, including some mentioned in this article, underlying them. As an issuer, we don't care how the market moves; our AUM is mostly driven by investor interest in our products.