The price of oil is set on the world market by what sellers are willing to sell it for and what buyers are willing to pay for it. Prices go up and down with supply and demand. When they go up, companies book profits from selling inventories that were acquired cheaply. Shortsighted critics denounce these big profits, but producers must have the funds to buy the next round of supplies. If they make big profits, they have more money to find the next supplies.

Higher prices are the only realistic solution to high energy prices: High prices stimulate new supply, reduce demand, and signal the need for new energy technologies. Just within the realm of oil, the oil locked up in tar sands and oil shale in North America alone exceeds the reserves of the entire Middle East. They are not counted in reserves because it would cost too much to produce it. It could not be sold at a profit.

When the price of oil rises enough, the oil shale industry will get on its feet. Once it reaches a size where economies of scale take hold, the abundance of oil from the new supply will drive prices down. How can we know this is true? It happened years ago in Texas, the Gulf of Mexico, and even the Middle East. Each of those famously productive territories was once too speculative, too hard to reach, too far from markets, and too expensive to develop. Each time, and many other times, a shortage of production pushed prices up so much that the cost of developing a new oil patch came within reach. Each time, the new province of oil reserves brought so much new oil on the market that prices collapsed. After the railroads reached Texas oil country, after the offshore drilling rigs were built, and after the fleet of supertankers went into service, enormous quantities of oil had to be sold to pay for the investments.

The only times Americans have ever been inconvenienced by their reliance on imported oil were from 1974 to 1975 and 1978 to 1979, when the federal government intervened to save us from paying “too much” for oil and gave us energy shortages, with lines of cars around the block waiting to get into gas stations. As the nation should have learned in the noncrisis of 1990 to 1991 and the noncrisis of 2004 to 2008, real energy independence is the freedom to buy fuel on the market at a price reflecting the demand for the fuel, with as few distortions imposed by government as possible.

When gasoline prices rise to $3 or more for a gallon of regular gas, American drivers may be forgiven for thinking there’s a big problem. But the role of oil in the world economy is often overrated. Consider the size of the Saudi Arabian economy—45 percent of the desert nation’s gross domestic product (GDP) consists of oil production. The whole Saudi economy produced only $286 billion in goods and services in 2005, much of it with the help of 5.5 million foreign workers. Taiwan, with about the same number of people and no oil resources to speak of, has a GDP twice as big.

Energy is one input—it does not determine the fate of a whole economy.

Until 1973, energy consumption rose in lockstep with GDP for most industrial nations. That was the easy way to grow. Thanks to cheap oil, energy was the least costly of common economic inputs. Using more energy was the cheapest path to a more profitable product.

Sudden increases in the price of oil in the 1970s broke the relationship between energy and output—much to the surprise of many energy economists. The world adapted, gradually but thoroughly. At first, high prices summoned geologists and engineers to find new supply sources; later the abolition of price controls in the U.S. rearranged the economics of oil in the ground. The U.S. could import more cheap foreign oil and avoid being forced to exploit expensive domestic oil.

Oil actually proved to be abundant, and many nations—Mexico, Norway, the United Kingdom, Indonesia, Russia, Venezuela, and Nigeria, to name a few important ones—had a lot of it. The price of oil fell.

Perhaps surprisingly, the supply of oil did not fall with the price. Oil exporters were as willing to supply it at low prices as they were at high prices at the peak of the 1970s energy bubble. They had oil, and they had invested in production facilities. They could not eat oil. They couldn’t afford not to sell it. They had to take the price set in the market. The most they could do was stop investing in new production facilities, and some oil-producing countries could not even do that because they needed oil revenues to purchase goods their own weak economies could not produce.

The Organization of Petroleum Exporting Countries (OPEC), the so-called oil cartel, had little if any power to punish cheating members, limit the production of nonmembers, or restrict the world supply in some other way. Member countries pursued their own self-interests, not caring if fellow members said they were “cheating” by producing too much.

In economists’ terms, the price of oil is driven by demand in the short term, and demand was generally weaker than supply from about 1982 to 2003.

Other factors of production became more important than energy because energy was cheap–almost as low as $10 a barrel as recently as 1998. In the 1980s and 1990s, when oil prices were low, the most profitable way to increase productivity was to rearrange labor costs. Japanese firms moved factories to the U.S., Korea, Taiwan, and China; Europeans moved factories to the U.S. and to Eastern Europe. The U.S. moved production to Mexico and then to China and elsewhere in Asia, and it loosened its immigration restrictions, formally and informally, to find workers for the new jobs being created.

European and Japanese industrialists moved to the U.S. to take advantage of the world’s most capital-intensive and productive labor force, and they moved to Central Europe and Asia seeking cheaper workers. American industrialists moved their less-productive jobs overseas, in part because the foreigners were bidding up American labor costs and in part because there weren’t enough new people to fill all the old and new jobs.

The “giant sucking sound” made famous by Ross Perot was actually the sound of a giant valve operating to relieve the pressure of too many jobs chasing too few workers. If freer trade with Mexico had really been bad for America as Perot imagined, it would have produced higher unemployment in the U.S. Jobs were lost but others were created, more than offsetting the losses.

In the past few years, however, the price of energy has been rising, especially in terms of the falling U.S. dollar. It’s a demand-driven price again, in a world economy that has expanded faster than expected.

As the price of oil rises and falls, it drives businessmen to the edge of sanity and politicians well beyond the edge. How can anyone plan for the future if we can’t predict the price of one of the most important resources that drives national progress, national income, and national wealth?

Fortunately, planning is part of the problem, not the solution. For about 30 years, economists and politicians have been flirting with a variety of national energy policies, most of them at least slightly crazy. They have tried inflation, price controls, supply allocations, supply subsidies, demand suppression, taxes, tax credits, regulation, and deregulation, and they have—most unforgettably—declared that the whole enterprise was “the moral equivalent of war,” an idea appropriately known by its acronym, “MEOW.”

Every president since Nixon has tried to impose a national energy policy, with or without a czar, and every president has failed. The reason: A national energy policy is impossible. Only a free market can send useful signals to suppliers and consumers, forcing them to make the difficult choices about their use of resources or to invent unexpected solutions that increase efficiency.

Remember these bold words?

“We will break the back of the energy crisis; we will lay the foundation for our future capacity to meet America’s energy needs from America’s own resources.” That’s what Richard M. Nixon said in his State of the Union speech during the Arab oil embargo in January 1974. He went on, “Let this be our national goal: At the end of this decade, in the year 1980, the United States will not be dependent on any other country for the energy we need to provide our jobs, to heat our homes, and to keep our transportation moving.” Nixon’s chief accomplishment was to impose price controls on oil and natural gas, an essential element in the ignition of a cycle of inflation and recession that lasted more than a decade.

The year after that speech, with the economy still reeling from the high price of energy, a new president resolved that the United States should be energy-independent and even be able to export energy again: “To make the United States invulnerable to foreign disruption, I propose standby emergency legislation and a strategic storage program of 1 billion barrels of oil for domestic needs and 300 million barrels for national-defense purposes. I will ask for the funds needed for energy research and development activities. I have established a goal of 1 million barrels of synthetic fuels and shale oil production per day by 1985, together with an incentive program to achieve it. Within the next 10 years, my program envisions 200 major nuclear power plants, 250 major new coal mines, 150 major coal-fired power plants, 30 major new refineries, 20 major new synthetic fuel plants, the drilling of many thousands of new oil wells, the insulation of 18 million homes, and the manufacturing and the sale of millions of new automobiles, trucks, and buses that use much less fuel.”

That was Gerald R. Ford’s program in 1975. The Strategic Petroleum Reserve was a relatively successful part of the program in the sense that it actually exists, though it’s smaller today than what Ford imagined in 1975. Corporate Average Fuel Economy standards also exist. The less said about either one, the better. Higher fuel prices could have done more with less fuss, but most American politicians prefer low prices, an elaborate bureaucracy, and a continual fight among themselves to adjust the fuel-economy standards.

Most of Ford’s other plans vaporized. Although candidates and presidents cribbed from his list of priorities for the rest of his life, Ford’s vision of energy independence was considerably farther out of reach in 2007 than it was in 1975.

Determined to be more effective, the next president declared the struggle for energy independence to be the “moral equivalent of war.” Unfortunately, Jimmy Carter declared the war on the U.S. economy, creating the Department of Energy and winning the enactment of a comprehensive national energy policy. He also pushed Congress to pass Ford’s idea of a windfall-profits tax, depriving energy companies of money they could have used to enlarge and modernize their industry. He created subsidies for energy conservation, solar energy, wind energy, gasohol, synthetic fuels to be made from coal, and the trans-Alaska pipeline, distorting energy markets and leaving American citizens and businesses feeling that energy efficiency was a government entitlement program.

Offsetting these missteps was the great achievement of the Carter administration in energy: Congress enacted laws to end Nixon’s price controls on oil and natural gas.

The next president hardly needed an energy policy. Ronald Reagan needed only to confirm the decontrol of oil and natural-gas prices, watch freedom take effect, and stand aside as high prices called forth more supply around the world. The U.S. diversified its purchases of imported oil and conserved its own resources. Buying from low-cost producers was far more efficient than subsidizing high-cost domestic drillers.

Reagan gave eight State of the Union speeches and mentioned energy only twice—once to herald complete decontrol of energy prices and once to request demolition of the Department of Energy. During his presidency, the inflation-adjusted price of oil and other forms of energy nearly collapsed.

This was not entirely good news: High prices had made most sectors of the economy more energy efficient. The American economy enjoyed higher productivity for years after, partly because of its increased energy efficiency, but low prices sapped the will to invest still more in efficiency.

The latest national energy policy was enacted in 2005, and even President Bush acknowledged as he signed the bill that it would be a first step: “This bill is not going to solve our energy challenges overnight. Most of the serious problems, such as high gasoline costs or the rising dependence on foreign oil, have developed over decades. It’s going to take years of focused effort to alleviate those problems.”

There is, however, very little focus in the national Energy Policy Act. It sets self-contradictory goals, as it must if it seeks lower gasoline prices and reduced dependence on foreign oil. One or the other may be possible, but most of the oil that’s cheap to produce comes from overseas, and all the possible domestic substitutes are expensive.

The 2005 Energy Policy Act promotes conservation and greater exploitation of existing fuel resources. It favors coal and nuclear energy. It seeks greater production of oil and natural gas and rejects development of offshore resources in Alaska, California, and the Florida Gulf Coast. It pays for research into oil production from tar sands and oil shale and for renewable energy substitutes such as wind, ethanol, and biodiesel.

In the America of the newest National Energy Policy, the government likes and supports some things, and it doesn’t like and tries to suppress other things.

The government likes oil drillers and refiners and substitute forms of petroleum and natural gas. All are worthy of subsidies, even though the market is providing generous incentives already, in the form of high prices. It likes farmers, too—its favorite substitute for oil is ethanol from corn, which receives generous subsidies for producers and processors. Subsidies also flow to diesel fuel made wholly or in part from vegetable oil. Both ethanol and biodiesel cost about a dollar more than their oil-based competitors, but the National Energy Policy subsidizes the market for them and mandates that refiners provide them.

The government likes coal but wishes it weren’t so dirty to burn, so it will pay for more research into ways of making “clean coal.” Some day, if all goes better than it ever has, the government will build a coal-fired electric generating plant that has no more harmful emissions than an atomic power plant. While we are waiting, it is also going to subsidize the construction of nuclear power plants and subsidize insurance for them.

The government likes imported liquid natural gas (LNG), and Congress isn’t going to let any not-in-my-backyard neighbors get in the way: The Federal Energy Regulatory Commission will have exclusive jurisdiction to decide where LNG shipping terminals can be built and new electric transmission lines will receive the same treatment. But there is no federal override of state and local authority over the location of new power plants, especially not for locating new nuclear power plants. The government likes them, but not that much.

The government likes energy efficiency at home, so it gave a 10 percent tax credit to homeowners for investing in saving energy—but only in 2006 and 2007 and only for investments up to $5,000, only $2,000 of which can be for improving windows.

The government dislikes appliances that use too much energy, so there are new efficiency standards for refrigerators, ceiling fans, torchiere lights, and space heaters. The government doesn’t like to make us pay the full value of efficient appliances, so it gives us tax credits to offset the cost of improving home-energy efficiency through the purchase of better central air conditioners, water heaters, storm windows, insulation thermostats, and other equipment. Some of these attract 30 percent tax credits; some don’t. Some were for 2006 and 2007 only, and some lasted longer. The government likes accountants and tax lawyers even more than it likes energy efficiency.

The government doesn’t like restraints on the use of inefficient automobiles; it will not mandate that car engines be inspected for efficient operation, which would save energy and clean the air at the same time. Nor will it raise any fuel taxes. It thinks conservation and efficiency can go too far by making people pay a lot.

The government does like efficient automobiles, really it does, but it knows we don’t like to pay for them, so we get tax credits to help us buy diesel cars, fuel-cell cars, electric-gasoline hybrid cars, and cars that can use more ethanol. But not too much: The tax credits are capped at $3,400 per vehicle, and they are reduced for vehicles that are successful in the market. The credits are phased out for any model that sells more than 60,000 units. That’s because the government likes American car companies, which are unlikely to sell as many favored cars as Toyota and Honda.

As this brief sample of our government’s energy likes and dislikes makes all too clear, what the government really likes is wishful thinking, and what it really doesn’t like is taking the heat for higher prices. The government isn’t sure if it likes profits or not and it doesn’t understand the role they play in the market. But higher prices and bigger profits are what we need if we want to use energy more wisely.

While H.L. Mencken probably had it right when he said nobody ever went broke underestimating the intelligence of the American public, it is also true that Americans are capable of learning from their mistakes. Winston Churchill observed that, after trying everything else, Americans will usually do the right thing.

That’s why we aren’t in long lines on odd-numbered days, waiting for dwindling supplies of gasoline to be delivered—whatever is left after adequate supplies are rationed out to anyone the government considers an essential user. We tried that twice in the 1970s, and it didn’t work either time.

Americans learned that a freely floating price clears a market and matches demand with supply. They have learned that price controls—on gasoline, anyway, if not on pharmaceuticals or city rents—are self-defeating and lead to shortages, rationing, more shortages, and general annoyance.

Most American politicians have been careful not to mention price controls on gasoline, even as oil and refined products set record price after record price in dollar terms. (Adjusted for inflation, the $39.50-a-barrel oil-price record set in 1980 is equivalent to about $90 a barrel today.)

We could be doing a lot to create more supply. We could, for example, open the Alaska National Wildlife Refuge for exploratory drilling. There may be oil there. The drilling site is a tiny portion of a barren plain, but there are those who love it, and they have friends in high places who are every bit as powerful as the friends of the energy industry.

Drilling there should be allowed, just as it should be allowed in the waters off the west coast of Florida, the Santa Barbara Channel, and other politically sensitive areas. Environmental damage can be prevented, controlled, and punished without invoking prior restraint. But advocates of new drilling on the Arctic coastal plain, Florida, and California don’t have the votes in the U.S. Senate. They can console themselves with the thought that the oil won’t evaporate, and if it’s ever really needed, it will still be there, caribou or no caribou. New wells in Alaska couldn’t affect the world price of oil for at least a decade, anyway.

The best thing Congress could do, however, is get out of the energy business and eliminate the Department of Energy in the bargain. Most of what the federal government does in the energy industry involves subsidies, tax breaks, and targeted investments. Economically useful actions could be done privately without federal intervention, but private interests are waiting to see if free money falls from the sky before committing their own resources.

One of the most curious oversights in the quest for clean energy sources is nuclear power. The U.S. has 103 nuclear power plants, generating about 20 percent of American electricity needs. But no plants have been ordered since the accident at the Three Mile Island plant in 1979. No accidents have occurred in the U.S. since 1979, and even that accident did not kill or sicken anyone. Dozens of people die every year in U.S. coal-mine accidents, hundreds are injured, and hundreds more suffer before death from black-lung disease, but American utilities have ordered many big coal-fired power plants since 1979.

The explanation is that many people are afraid of nuclear power. They associate nuclear fission with the bombs that so shockingly destroyed Hiroshima and Nagasaki at the end of World War II. They don’t understand the science and engineering that makes nuclear power generation different from atomic bomb-making, and they have little faith in those who tell them it’s safe. The 1979 accident at Three Mile Island, which was dangerous but caused no serious damage to anything but the reactor, took its toll on public trust in nuclear power. The deadly Soviet accident at Chernobyl in 1986 was even more shattering. Unfortunately, some wild estimates of deaths and long-term damage were current in the news at the time and never reduced in the public mind to reflect reality.

There are two big technical issues that are serious: the disposal of spent fuel, which is dangerously radioactive but no longer useful for generating power, and the protection of all sorts of nuclear material, fuel, spent fuel, and by-products. If the wrong people obtained it, some of the material could be used to make weapons. It’s also true that nuclear power plants operated with bad intent could be used to enrich fuel to the concentrations needed to make atomic bombs.

This last danger should not create an objection for U.S. power plants; we should be able to police and regulate them in our own country. Protecting nuclear material and spent fuel isn’t that hard either, but we get in our own way doing it.

Since the 1970s, the United States has declined to reprocess spent nuclear fuel. President Carter decided it set a bad example for the world because reprocessing plants present the easiest opportunities to create bomb-grade nuclear fuel. Carter decided that if we don’t want other countries to reprocess fuel, we should not do it ourselves. Unfortunately, the rest of the world did not follow our example. Reprocessing plants operate in Russia, France, and Japan; China and India have plans to build them.

The American choice for dealing with spent nuclear fuel has been to bury it at a specially equipped cavern in Nevada. The Yucca Flats facility has been fought over for decades. If it’s ready at last in 2010, as now expected, it will have only the capacity to store the spent nuclear fuel already created, which is currently stored at the nation’s existing nuclear power plants. It will not be available as a repository for future waste created after 2010. For that, the country will have to enlarge Yucca Flats or build another repository—and argue about it for another couple decades.

Recycling through reprocessing makes more sense than just burying spent nuclear fuel rods. The quantity of dangerous waste would be substantially reduced, and the amount of energy extracted from a given quantity of uranium ore would be substantially increased. It’s a more efficient solution.

Nuclear power plants do have to be built correctly, by experts, and there is a need for close scrutiny—independent regulation of construction—by a team of other experts. In the U.S., we have depended on the Nuclear Regulatory Commission to watch the electric companies and their construction contractors.

Problems have occurred, but no big mistakes. Still, the federal regulators can’t be everywhere and can’t do everything. That, however, was the assumption during the Eisenhower administration, which worked with Congress to eliminate the normal private sector approach to dangerous projects in favor of government regulation. Fearing that no American electric company would venture into the unknown world of nuclear power generation, the Eisenhower administration and Congress sharply limited the utilities’ potential liability for damages caused by nuclear power plant accidents.

This relieved the utilities of the necessity of paying huge sums for insurance premiums and relieved insurance companies of the responsibility for evaluating the safety of power plants. All the responsibility was put on the Nuclear Regulatory Commission (NRC), then known as the Atomic Energy Commission.

As a general rule, bureaucrats have no incentive to make a success out of what they regulate, although they have huge incentives not to let it become a failure. NRC regulation has been heavy-handed and slow, not merely risk-averse but averse to making any kind of decision without endless study. It earns no premiums for doing a careful but quick evaluation and pays no penalty for doing it inefficiently.

Federal regulation may have been an appropriate regime for the 1950s, when nuclear technology was new and a closely guarded military secret. Only a federal regulator could handle the knowledge that would supply the weapons for World War III. But if it remains appropriate decades later, it is hard to see why. Countries as technologically backward as Pakistan and North Korea have mastered bomb-making engineering; 30 countries operate 439 power plants; 69 countries operate nuclear reactors for research.

The civilian nuclear power industry is beginning to recover from the long shock that followed Three Mile Island. In 2007, the NRC received its first full application to build a new nuclear power plant since 1978, and there are dozens of preliminary filings from utilities testing the regulatory waters.

In 1956, geologist M. King Hubbert predicted that the U.S. would hit peak oil production in 1970. He was right, at least for the time being. No matter how fast wildcatters have found new reserves or producers have drilled wells in the U.S., new supplies have not offset declining production from older wells.

Hubbert died in 1989 but his followers now make the same prediction about world oil production: Between 2004 and 2030, the world has reached, or will reach, the peak, and no amount of furious searching will ever replace all the wells that are running dry. So they say.

There’s a lesson here, but not the one oil prognosticators offer. The correct lesson is to not ask geologists about economics. Hubbert’s prophecy holds only as long as the price of oil defines the supply.

We have no idea how much oil is still to be found. What we do know is that the more oil prices rise, the more oil will be produced. Furthermore, the more oil that is produced, the more likely it is that prices will fall.

A quick look around the world finds uneconomic oil in many places. Venezuela has more oil than Saudi Arabia, if you count its ultra heavy crude and tar sands. Canada has more than Saudi Arabia, if you count its tar sands. The U.S. has more than Saudi Arabia many times over, if you count its oil shale and coal, which could be converted to gasoline and diesel fuel.

Price is the problem, not geology. At the $20-per-barrel average market price (adjusted for inflation) that has prevailed for decades and has determined what oil can be produced at a long-term profit, tar sands, oil shale, and coal conversion have not looked like good investments. It costs too much to build the extraction industry and rebuild the refining industry, so these resources aren’t counted as reserves.

As noted earlier, however, once upon a time it cost too much to drill in a far-off desert and build a fleet of supertankers to carry the oil to customers. Once upon a time it cost too much to drill offshore and build underwater pipelines to carry the oil to customers. Once upon a time it cost too much to pump more than about a third of the oil from any given well. Then, when some critical oil field in Pennsylvania or Texas reached peak production and market prices rose, the required investments suddenly made sense.

Once the industry adapted to the new definition of producible oil, the new supplies supported by new infrastructure overwhelmed the market, and the price fell back to that inflation-adjusted average of about $20.

We should be nearly certain that the process of boom and bust will prevail at least once more. Oil at $100 means oil at $20 eventually, even if it has to go higher to get there.

If world oil production peaks soon, it is quite possible that there will be problems. The world might need two decades for a crash program to develop new liquid-fuel sources. The U.S. Department of Energy estimates construction of a single substitute-fuel plant could cost $5 billion and require the better part of a decade to build. Such a plant might yield 100,000 barrels of liquid fuels per day—a drop in the world’s energy bucket if a world oil shortage quickly escalated to tens of millions of barrels per day.

But build we must, say many of the worriers, stressing their view that the market cannot create new sources of energy in time to avert an economic crisis. Whether their favorite is a hydrogen economy or the creation of synthetic fuels, they call for government investment and government subsidy to bring the price of alternatives within reach of the marketplace.

It’s a big job, calling for a big government with big ideas—just the kind of government we should have learned not to trust. The pathetic excuse for an energy bill pending in Congress is replete with special subsidies and attempts to manage the future.

Energy is traded in markets, and markets mitigate the economic impact with price increases. There will never be a serious long-term shortage of energy as long as we do not impose price controls or impose a political vision of new fuels and technologies.

There will just be higher prices, and some uses of oil will be priced out of the market. This will be no disaster: All users of energy will be forced to conserve it. At the same time, price increases will drive capital and capitalists toward newly attractive investment opportunities in energy supplies, just as low prices drove investors away from the oil business for the last two decades.

Profits are the appropriate spur to timely action. Government energy “investments” made before profits can be earned in the market are just welfare programs for geologists and engineers.

The messy, chaotic mechanisms of the market, which nobody can predict or control, offer the safest and most efficient routes to energy security. We won’t have to fight the Chinese or the Indians for energy; we will have to use energy and other economic inputs more efficiently to stay rich enough to afford all the energy we need.

In 1865, an English economist of similar mind anticipated peak-oil geologist M. King Hubbert. William Stanley Jevons contemplated the exhaustion of British coal supplies, which then seemed inexhaustible. After a discussion of rising consumption and fixed supply that drew heavily on the methods of Thomas Malthus, Jevons then rejected other sources of energy, such as firewood, water power, tidal energy, windmills, and electricity. In a book titled The Coal Question, he said, “Petroleum has of late years become the matter of a most extensive trade, and has even been proposed by American inventors for use in marine steam-engine boilers. It is undoubtedly superior to coal for many purposes, and is capable of replacing it. But then, what is petroleum but the essence of coal, distilled from it by terrestrial or artificial heat? Its natural supply is far more limited and uncertain than that of coal, its price is about 15 pounds per ton already, and an artificial supply can only be had by the distillation of some kind of coal at considerable cost. To extend the use of petroleum, then, is only a new way of pushing the consumption of coal. It is more likely to be an aggravation of the drain than a remedy.” Putting an end to the discussion, Jevons concluded, “We must not dwell in such a fool’s paradise as to imagine we can do without coal what we do with it.”

Jevons had limited understanding of geology and chemistry as applied to petroleum, and he also had limited insight into the power of prices. That 15-pound-per-ton price for petroleum was already inspiring new discoveries and new technology for exploitation. The inflation-adjusted price of petroleum, indeed, would never again be so high.

For many years after Jevons, British prosperity was indeed founded on coal-fired steam power. By the 1960s, however, his forecast that coal production would be played out had nearly come true. Many British mines produced nothing but rock, others only very low-grade coal. By that time, however, the coal mines of Britain were under the control of the state, and the state was in thrall to the national miners’ union. A courageous and practical prime minister, Margaret Thatcher, closed unproductive mines and accepted the inevitable strike. It turned out that imported coal, oil, and gas were competitive with British coal. The miners lost their rock-digging jobs but the nation went forward, more productive, better fueled, and less beholden to its overprivileged unions.

Twice in recent years the high cost of energy has focused Americans’ attention on economic principles. They have learned that supply and demand push and pull markets and that they work better when governments don’t interfere very much. The massive inconveniences of long gas lines in the 1970s were the fault of government price controls and supply allocations. By the beginning of 2008, Americans were facing higher prices than in 1979, adjusted for inflation, and yet there were no gas lines because markets were allowed to function.

Likewise, the goal of energy independence is chimerical. We already have access to the sources of energy in the world energy market, where prices reflect the current need for fuel, the world’s best estimate of future demand, and the world’s best estimate of the marginal cost of replacing a unit of energy with a new one. These are the lowest possible realistic prices at the moment.

Finally, high prices will do more in less time to cure a shortage of energy than anything else. High prices will curtail use, focus consumers on using energy efficiently, and create the capital necessary for investment in new sources of energy. If we let the market decide which sources of energy best satisfy our needs, we will have what we need at the lowest possible cost.