Rock. Hard Place.

Perhaps the central tenet of free markets is the Darwinian threat to poor performance:  if a management team doesn’t perform, fails to create value for shareholders, the business will be vulnerable to takeover.  Poor managements can, ultimately, create value for shareholders as, more often than not, strategic value is greater than any company’s fair trading value.

It’s one of the wonderful paradoxes of the free market.  It’s a paradox that drives innovation and progress throughout the western, democratic free markets.  It’s why we are most comfortable when markets are free to operate without the heavy hand of government intrusion or regulatory restriction.

Yet, as governments and regulators become attuned to the profound changes afoot in the energy industries we are possibly faced with the prospect of the EU’s energy industries being labelled ‘strategic’.  In effect these industries could well be too important, too critical, to be left to the mercy of free markets.

It’s not that markets don’t work, per se.  The EU’s thinking stems from the fact that these free markets are coming under the increasing influence of parties who themselves do not respect free market rules.

Energy is the global economy’s sine qua non.  Any economy that possesses cheap and abundant energy and cheap money is positioned for growth. Either of those two factors fail and we’re talking a possible recession.  Both fail and we’re screaming pain.

The EU is pondering a quandary that markets haven’t ever really had to consider.  In the past the markets have been too powerful for vested interests to disturb with any meaningful success.  Such is the power of money.  Such has been the value of cheap strategic resources.

The fact of the matter is that expensive energy is a difficult and challenging enough obstacle for the global economy.  Any increased regulation of markets would make that obstacle all the more complex and protracted.  The inevitable consequence is confusion and uncertainty.  Add those ingredients to a recipe of a liquidity crisis and volatile oil prices and the global economy will have to do something fairly spectacular to continue to sustain its value.

The FT’s front page this morning confirms one thing:  reading market performance is becoming an increasingly political affair.  Read the politics right and you’ll be more than halfway to reading the markets.