The paper develops a theoretical framework to show how energy affects investments and economic growth. Empirical estimations using single equation methods and a system with five simultaneous equations for a sample of 37 developed countries with five-year average panel data over the period 1975-2004 are presented. It is shown that rising energy prices are not a threat to long-run development. On the contrary, I find conditions under which decreasing energy input induces investments in physical and knowledge capital. A ten percent increase in energy prices is found
to raise the growth rate by 0.2 percentage points.