Back before the mortgage meltdown turned into the worst financial crisis since the Great Depression, the country’s big economic problem was energy. The presidential campaign was on fire over what to “do” about the price of oil. Gas cost more than $4 a gallon, it was slowing down the economy, people were driving fewer miles and they were flying less. Believe it or not, this was an economic crisis that affected people who didn’t happen to be pinstriped bankers, hedge-fund managers or cabinet officials. You didn’t have to read the stock-market columns to know it was happening. Ordinary people started walking to town or skipping errands — taking the compact and not the S.U.V. Actually, I did that. And then, the price of oil plummeted, first because of slowing demand and recently amid panic selling during the credit crisis. And as it plunged more than 40 percent from its record high of $147 a barrel, the issue has faded.

Well, gas still costs $3.50 a gallon, and the price of a barrel of oil, last week close to $80, still is four times what it was all of six years ago. If that doesn’t sound like a big deal, consider that in the half-dozen years of the housing boom, residential home prices rose only 125 percent, whereas oil prices, even now, are 300 percent higher than they were six years ago. So the energy issue is still here. Remember the winter after Katrina, when home-heating-fuel prices caused an uproar? This winter they are likely to be much higher.

When the new president takes office, high energy costs will be — as they are already — a drag on the economy, one that is becoming conflated with the credit crisis. Last month, the U.S. auto industry sold fewer than one million cars — its slowest sales rate in 15 years. Tight credit and high gas prices each contributed to that. There is no way to completely unravel the two, but here is one fact: In the early part of this decade, when oil was cheap, Americans spent only 2 percent of their income on gasoline. Recently they have been spending about 4.5 percent — more than twice as much. And you can bet that the percentage is higher among families with lower incomes.

What we should do about all this varies greatly according to your view of why gas prices went up. Various people who know the oil industry have been worrying for several years that global supplies were running low. Emerging (and populous) nations like China and India have been consuming more, and in many countries and for reasons varying from geology to politics, production was peaking or actually declining. So the supply-demand equation was getting squeezed on both ends. Last winter — when the price was in the neighborhood of $100 per barrel — John Hess, the chairman of Hess Corporation, told a conference of energy specialists, “An oil crisis is coming — in the next 10 years.” Just in case the age of oil is truly ending, Hess, a medium-size oil company, is investing in fuel-cell technology, an alternative to gasoline. Richard Rainwater, the Texas investor who made billions buying oil stocks, shares the view that oil is scarce, and so does Warren Buffett, the investor whom Wall Street has been dialing for rescue capital. “It’s supply and demand,” Buffett told me. “The ability to produce 10 percent or 12 percent more than the world needed was there, and we got lulled into thinking — we just kept assuming — it would always be there. But there isn’t any tap to turn on now.” (Disclosure: I own stock in Buffett’s company.)

Buffett said this during the summer, before high oil prices (and before the full force of the credit hurricane) slowed the world’s thirst for oil. Under current conditions, the oil “tap” is not so dry, though presumably, economic activity will pick up someday and oil will become scarce again. Of course, this is if you believe that scarcity had anything to do with why the price rose in the first place.

There is also another, highly publicized view of the oil market. According to skeptics like George Soros and Michael Masters, a hedge-fund operator, the only thing wrong with the oil market is the market itself. Speculators, they say, drove the price away from its “fundamental” value; worse, a new breed of institutional investor has been buying oil futures, hoarding the supply. Masters compares these investors to the Hunt brothers, the Texas billionaires who cornered the silver market in the late ’70s — until silver crashed and the Hunts landed in bankruptcy. Essentially, he says, the oil price is, or was, seriously “wrong” — a distortion caused by traders that has little to do with the amount of oil being produced and consumed.

According to this view, oil traders are the culprits, as are the futures market and the Commodity Futures Trading Commission, the federal agency that regulates it. (The agency has also begun its own probe of the oil market.) Masters has fired off scores of e-mail messages to journalists and Wall Streeters, urging limits on speculators. (One message found its way to Senator Joe Lieberman.) Masters is not a disinterested party; his hedge fund has bet heavily on companies, like Delta Airlines, that have been punished by soaring oil prices. But his argument struck a populist chord. “Speculators are driving up the price of food and energy for everyone else,” he told me. Shad Rowe, a Dallas money manager, says the situation raises the bigger question of “whether people in a complex society ought to be allowed to make bets that affect other people and that have nothing to do with them.”

Of course, capitalism demands that people, or at least investors, make bets. That is how resources are allocated and money is invested where it is needed; high prices communicate scarcity. You could even say the oil market has performed a vital service to the country by telegraphing the need to conserve and to develop alternative supplies. The number of miles driven by Americans has declined, in recent months, by close to 5 percent. Consumers have abandoned S.U.V.’s, forcing Ford to speed up its plans to close truck factories and emphasize small cars. For similar reasons, General Motors and Chrysler are rushing to introduce electric cars. All of this is healthy, and none of it would have occurred in an environment of $20 oil. “Should speculators go to jail,” notes Robert Barbera, chief economist with the Wall Street firm ITG, “or should they get the Congressional Medal of Honor?”

In a sense, the question is whether we want to return to an era of plentiful oil and low prices — assuming it is possible — or to accept that political, geological and possibly environmental limitations will force us to diversify. The candidates, while talking tough about cutting our dependence on foreign oil, have supported some policies that seem inconsistent with that aim. Barack Obama has called for investment in alternative energy sources like wind and solar, and for ramping up production of cars that don’t rely on gasoline. John McCain has supported offshore drilling and nuclear power. Such policies are responsive to the idea that energy, oil in particular, is a scarce resource. And a higher oil price is the most persuasive lobby for all of them. But on the stump, each candidate has inveighed against high gasoline prices — as if prices were the problem, rather than a useful, albeit painful, signal that conventional supplies are running low. Obama supports a windfall tax on oil-company profits, a nonsolution that would discourage drilling and potentially worsen future shortages. (An Obama campaign flier asserts, “While you’re running on empty, Exxon made $4 billion in one month.”) McCain advocated a temporary repeal of the gas tax — a measure that would do the most to revive Americans’ love affair with big cars.

Congress took a positive step toward energy conservation last year, raising mileage requirements to 35 miles per gallon, but the new standard will not take effect until 2020 and will not, even then, make cars in the U.S. as efficient as those now on the road in Europe, where the average is about 45 miles per gallon. Wind and solar credits were also extended as part of the financial-bailout bill. Congress also held hearings (with Michael Masters as a prime witness) probing the supposed harm done by oil speculators. Blaming speculators is good politics. In 1958, the government shut down the market for onion futures after a price spike, and recently the Securities and Exchange Commission has seemed to blame speculators for the havoc in bank stocks.

The S.E.C. may not be all wrong, but oil trading and stock trading differ in an important respect. The stock market is a secondary market, in which investors merely exchange shares with one another. Except for the relatively rare occasions on which companies raise capital by selling new stock, changes in stock prices have little effect on nontraders, which means that mispricings (or bubbles) can persist for a long time. But commodity markets affect not just investors but also people who use the actual goods — all of us, that is.

Crude oil and other energy products are quoted on the New York Mercantile Exchange, a vast commodities pit with giant, wall-to-wall screens that is also a market for metals like copper and gold. Traders at the Merc buy and sell oil for future delivery, and the price on the Merc serves as the reference price for oil shipments around the world. In other words, when a refinery contracts to buy crude oil from, say, Saudi Arabia, it generally agrees to pay the price on the Merc less a certain differential. (The discount depends on the quality of the oil being shipped.) Approximately 500,000 crude-oil futures contracts, representing 500 million barrels, trade on the Merc each day. By comparison, the world uses only 86 million barrels of oil daily. Though in theory the price on the Merc reflects the underlying supply-and-demand trends, on any given day the futures market often wags the physical market, not the other way around.

Last June 5, for example, when the decrease in Americans’ gasoline consumption was already apparent, crude oil inexplicably shot up $5.49 a barrel — a record move. As analysts searched for an explanation, the following day oil soared like one of those fabled East Texas gushers — up $10.75. According to Raymond Carbone, a floor trader on the Merc, two news items — neither having anything to do with supply and demand — were behind it. Jean-Claude Trichet, head of the European Central Bank, had made worrisome comments about inflation, which suggested that Trichet might raise interest rates, a step that could strengthen the euro and weaken the dollar. (When the dollar falls in currency markets, the price in dollars of international goods like vacations in France and barrels of crude oil generally goes up.) Also, an Israeli minister said it might be necessary to attack Iran. Israel did not attack — nor did the minister’s remark reflect any policy change — and the dollar was about to get stronger. Nonetheless, Carbone, who was betting on the rally to continue, figured the rumors were good for a ride and maintained his bets.

Looked at in isolation, trusting oil prices to Raymond Carbone and his peers on the Merc, and to their fellow speculators around the globe, does seem like madness. In two days, the price of a commodity that is a staple of everyday life rose 13 percent. According to a calculation by an energy economist at the Dallas Federal Reserve, that 48-hour market orgy weakened the future expected output of the U.S. economy by $90 billion, slicing more than half a percentage point off the gross domestic product.

But the link to the real economy means that commodity prices tend to correct relatively quickly. After all, when the price of a good is too high, people buy less of it. Also, a futures contract is not just a gambling chit (though many people use it that way). Futures are agreements to buy or sell actual oil (or corn or soybeans, etc.) at a future moment at a particular price. This makes them especially useful to hedgers, who use futures to offset risks in their business. Southwest Airlines correctly anticipated that oil would go up, and via futures bought its jet fuel in advance at prices lower than today’s.

Most of the trading on the Merc is probably done by speculators, not hedgers, and the vast majority settle in cash before their contracts expire. But the fact that traders have the right to settle in kind provides an important check. Say that traders went truly nuts and drove the price to $200 a barrel. Oil companies would take advantage and sell $200 oil by the boatload. Either the people who took delivery would be able to find customers for such expensive oil or — more likely — they would go broke, and the price would come crashing down.

The system sounds wacky, but those that preceded it were hardly better. Beginning in the 1870s, John D. Rockefeller tried to control oil’s price by monopolizing the distribution — until his company, Standard Oil, was dismantled in an antitrust case. In the 1930s, when oil sank to 10 cents a barrel, the state of Texas adopted a system that mimicked Rockefeller’s — or at least got the same result. For the next three decades, the Texas Railroad Commission controlled supplies by restricting well operators to a fixed number of production days per month. Then, in 1960, Venezuela and Saudi Arabia, which by then had supplanted Texas as the center of the oil world, founded the Organization of the Petroleum Exporting Countries with the same principle in mind. (In fact, the founders hired a former Railroad Commission engineer to show them the ropes.) Since 1983, when the Merc introduced the crude-oil contract, investors and traders have largely assumed the cartel’s former function of setting prices.

The reason that the history of oil is basically one of attempted price fixing is that, as technology has improved, drilling costs have fallen, meaning that prices have been under near-continuous downward pressure. Like most commodities, oil should sell for whatever the cost of producing one additional unit is — in this case, one more barrel. Economists call this the “marginal” cost. If someone charges much more than that, a competitor can offer to sell it more cheaply.

It’s only when oil is scarce that things become interesting. If there isn’t enough to go around, then the marginal cost no longer matters because, at the margin, there is no more oil to produce. Under such conditions, oil will rise to the price at which people stop using it — either because they drive less or because they find another energy source. This is called the price of demand destruction. Think of that as the upper bound on the price. With the twin shocks of the ’70s — the Arab embargo and the Iranian revolution — oil did reach an upper bound, jumping tenfold to $40 a barrel in 1981. Demand quickly collapsed, and the price eventually sank all the way back to the marginal cost, $12.

Low prices were good news for consumers but a mixed blessing for society. Since it takes time for oil companies, as well as consumers, to react to price changes, markets tend to respond with a perilous lag. In the ’80s, oil companies were spending billions looking for oil, and Detroit was retooling its plants to make smaller cars, even as the price of oil was collapsing.

In the mid-1980s the oil industry suffered a terrible slump. Thousands of petroleum engineers were fired or left the business. Congress lost interest in energy conservation, and projects to develop shale oil and other alternatives were dropped. In Europe, high fuel taxes meant that people still had an incentive to conserve. In America, families became unwilling to ride in anything but trucks.

Even as oil prices rose in this decade, big oil companies — still responding to the price signal of an earlier period — plowed most of their cash flow into dividends and stock repurchases rather than risk it on exploration. State oil companies overseas, like Saudi Arabia’s, which control four-fifths of the world’s reserves, refused to make the investment to develop their fields to full potential for fear of flooding the market (another reaction to low prices). For similar reasons, there was a lull in building critically needed refineries.

By the time oil companies woke up to the consequences of low prices, it was in some sense too late. There was “a missing generation of engineers,” according to Daniel Yergin, the chairman of Cambridge Energy Research Associates and the author of “The Prize,” a history of the oil industry. There was also a lack of drilling rigs and men to work them. Drilling costs soared, and equipment was often unavailable. Also, countries where oil is abundant, like Russia and Venezuela, were increasingly chauvinistic and hostile to foreign operators. Civil unrest set back production in Nigeria.

By the middle of this decade, various big oil regions — Mexico, Nigeria, the North Sea, Colombia, Venezuela — were experiencing production declines. Matthew Simmons, an energy banker in Houston, made a startling forecast: the entire world’s oil production, he said, was peaking and was headed for irreversible decline.

Simmons was dismissed as an alarmist, and much of what he said was extreme. He spoke of a looming, postglobal economy in which transportation grinds to a halt, almost a literal return to the Dark Ages. This isn’t going to happen. At least not right away. The world has 1.3 trillion barrels of proven reserves, enough for 40 years at current rates of consumption. “Peak oil is about geology,” notes Marianne Kah, chief economist at ConocoPhillips. “I don’t think we are running out of oil. We are running out of access to oil.”

Kah is right: there is plenty of oil. But it cannot be withdrawn at will like money from an A.T.M.; wells yield only so much liquid per day. And since the flow from aging wells declines by about 5 percent a year, producers that stand pat will shrink. To stay even requires investment — and usually, the incentive of a high price. It also takes time. Thus, in the short run, whether the constraints on supplies are geologic or human may not matter.

What frightened markets last spring was the awareness that capacity was flattening at the same time that a strong global economy was pushing demand rapidly higher. And emerging nations would seem to have a lot of oil-demand growth ahead of them. While the U.S. consumes 25 barrels of oil per capita annually and Europe 10 barrels, each Chinese consumes 2 barrels a year. Given their numbers, even a small amount of growth in Chinese consumption will offset a great deal of conservation in the U.S. Rising demand is especially ominous in light of Buffett’s point: there is less spare capacity than in the previous decade. Before, if a war or hurricane were to interrupt supplies, Saudi Arabia could always open the tap farther. Soon there might not be enough. “Imagine if you and I were trading jelly beans,” Ken Hersh, who runs an energy fund, offered in a telling metaphor. “We both love jelly beans, we know our kids are going to like ‘em, and our kids’ kids, and five years from now we have to make a trade and we look in the jar and there is only one jelly bean left.” As traders wondered what would happen if there was a natural or man-made disaster, they were pricing each barrel as if it were the very last jelly bean.

Institutions also have been counting jelly beans. After the stock-market disasters of the dot-com collapse in 2000 and Enron in 2001, big investors began to look for alternatives to stocks. Wall Street promoted commodities as the answer, and institutions like Harvard University and the California Public Employees’ Retirement System have taken a flier on commodity indexes that are heavily weighted in oil. Masters is incensed because such investors tend to hold for the long haul and thus, he claims, to remove supplies from the market. Then again, commodities could be just the latest fad. Literature from A.I.G., the recently rescued insurer, described commodities as “an asset class which has returns that have historically been comparable to stock returns but with lower volatility.” This is a gross distortion. (It is true only if you calculate the returns in a highly stylized manner.) The fact is that from 1975 to 2005, the average commodity did not keep up with inflation, much less with the stock market. Whether it is wise to invest pensions and endowments in rocks is, of course, their business, but it is hard to see why they should be less free than others to express an opinion — even if it does feed into prices. This, in fact, is what speculators are supposed to do: translate (however imperfectly) expectations about the future into today’s price.

You can argue that last July’s $147 peak was irrational, but Aubrey McClendon, the chief executive of the Oklahoma-based Chesapeake Energy, says it was merely the answer to a real-world economics quiz: at what price would the world consume less oil? Americans began to cut back on their driving at $50 oil, and at something like $120 oil they garaged their S.U.V.’s en masse. People in many emerging nations were slower to react, because their governments subsidize local gasoline prices. But as the price rose, such a subsidy became costly, and beginning in May, China, India, Indonesia and others cut their subsidies. The upper bound had been reached.

It’s actually the lower bound that should concern Washington now. When you ask economists what the minimum oil price is to sustain the development of alternatives to gasoline — new battery systems or sugar ethanol or even wood chips — you get a range of something like $75 a barrel to maybe $150.

Marginal costs for oil are less than those for alternative technologies, though they are rising. The marginal barrels today are found in remote and costly terrain, like the Canadian tar sands or off the coast of Brazil under 7,000 feet of seawater and more than 10,000 feet of ocean floor.

One intriguing alternative is natural gas. Its price also soared, from $2 per thousand cubic feet to $13. And while U.S. oil production has been falling for four decades, the gas industry is experiencing a revival. Most recently, gas companies have embarked on a frantic quest to lease land in a vast, wooded region of the Northeast known as the Marcellus Shale that may contain more natural gas than anywhere else in America. The drilling uses a new technology to inject water deep below the surface to split apart the shale, then underground drilling continues horizontally for hundreds of feet.

Farmers in the Marcellus who once leased land for $2 an acre are reaping fortunes. One 73-year-old dairy farmer leased 1,100 acres for $2.5 million. There could be many more like him out there. The United States has a lot of untapped shale, and there is no engineering reason that America could not substitute gas, which is cleaner and produces only half as much carbon as oil, for much of its driving. Eight million cars in the world already run on natural gas, though very few in the U.S. do. To Barbera, the economist, whose family owns some land in the Marcellus, it proves that technology will frustrate Thomas Malthus, the classical economist who forecast catastrophic, population-induced food shortages. The only risk in the Marcellus is that falling prices will sabotage the entire enterprise. Last summer, when gas was at a peak, Barbera told me that the gas companies rushing to sign up farmers reminded him of the way venture capitalists once threw money at Web sites. They shouldn’t be asking how high gas can go, he said; they should be asking at what price does the drilling stop.

Bingo. Gas has fallen to $7. If it falls much more, the Marcellus looks a lot less interesting. And if oil falls to $70, so do other alternatives.

It would be a tragedy if falling prices were to extinguish such alternatives and — given the time lag inherent in energy development — leave the country vulnerable to a yet another round of shocks. There is no disputing, as Ben Bernanke said, that recently falling oil prices are giving the economy a shot in the arm. But new energy projects also create jobs, and though oil prices impose a cost, Europe has lived with high prices (because of the imposition of taxes) and adjusted to them.

What can Washington do now? McClendon, the Chesapeake chief executive, whose company is active in the Marcellus, is angling for federal subsidies to help service stations convert to natural gas. This is what every energy pioneer wants: subsidies for what it does. But Congress is probably not the optimal institution for anointing technological winners. Its mandate to use corn for ethanol, while it has done wonders for Iowa farmers, has led to sharply higher corn prices and has not added much (if anything) to the country’s energy supply. And even if politicians act with the purest of motives, there are simply too many possibilities for the car of tomorrow (fuel cells, nickel-hydride or lithium-ion batteries, natural gas, biofuel from wood chips and oil itself) to know which will prove the most feasible.

The government could help finance basic research, but there is no reason to rule out any source — oil included. By restricting offshore drilling, the United States is shunning an estimated 18 billion barrels of oil (equal to 80 percent of our proven reserves). As McClendon says, it’s hard to fault Mexico or Saudi Arabia for not developing their fields to the max when the U.S. declares its own territory off-limits.

What the country doesn’t want is to remain dependent only on oil — to lose the urgency to develop alternatives. It happened once before. After the gas lines of the ’70s, Jimmy Carter declared that solving our energy problems was the moral equivalent of war. Then, in the 1980s, Americans forgot.

The way to avoid a repeat is to dust off an idea that Gerald Ford once proposed: a tax on oil. Ideally, it would kick in only if the price fell back to, say, $70 a barrel. The beauty of this tax is that, very likely, no one would have to pay it. The tax would merely serve as a floor — a new lower bound. Auto companies would never have to worry that cheap gas would tempt consumers away from efficient cars; investors could finance development of batteries and fuel cells, because cheap oil could never undercut them. Oil itself would be used more sparingly and last longer. The oil market did its part when it sent the price to almost $150. The government should make sure there is no going back.

Roger Lowenstein, an outside director of the Sequoia Fund, is a contributing writer for the magazine. His most recent book is “While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC subways, Bankrupted San Diego and Loom as the Next Financial Crisis.” - Article By Roger Lowenstein ,Photo Illutstration by Dan Winters, Metal Fabrication by Justin Halliburton.