In fission yeast, the endoplasmic reticulum membrane-bound proteins Sre1 and Scp1, orthologs of mammalian sterol regulatory element binding protein (SREBP) and Scap, monitor sterol synthesis as an indirect measure of oxygen supply. When cellular oxygen levels are low, sterol synthesis is inhibited, and the Sre1-Scp1 complex responds by increasing transcription of genes required for adaptation to hypoxia. Sre1 and Scp1 are believed to detect a blockage in sterol synthesis by monitoring levels of particular sterols, but the evidence concerning which sterol signals this condition is unclear. Here, we demonstrate that Sre1-Scp1 senses ergosterol. Processing experimental data with a mathematical model of Sre1 and Scp1 function reveals a clear quantitative relationship between ergosterol concentration in the endoplasmic reticulum and Sre1 activation. Based on this relationship, we predict that the Sre1-Scp1 complex exists under "active" and "inactive" states and that the transition between these states is cooperatively mediated by ergosterol.