Energy is a vital ingredient to economic growth. This has been recognized at least as long as economic statistics have been compiled by government, and probably for much longer than that. Perhaps the best example of the fundamental role that energy plays in large, complex national economies is found in the 1973–1974 oil embargo, when oil-producing nations of the Middle East restricted supply and prices rose fourfold in a space of a few months. The resulting chaos in the oil-consuming economies of the industrialized West was widely considered to be a direct result of the embargo. In the United States alone, Gross Domestic Product—an accepted measure of economic activity—fell in 1974, after two decades of steady growth. The high cost and scarcity of oil was seen as the primary cause.

Energy as an Input to Production

What makes energy and...