Energy affects consumer choices large and small, from a replacement light bulb to the kind of car we drive.
It influences investments businesses make in new equipment and technology. And it creates opportunities for companies that either provide energy or help conserve it.
And the energy marketplace is changing dramatically.
In Outlook 2012, The Morning Call examines how changes in the energy industry can mean pain at the pump for consumers grappling with rising prices and stagnant wages, and how it can bring savings for those savvy enough to seek out low-interest loans for home and business upgrades.
While energy markets are highly volatile and difficult to predict, one thing is certain. The more you know about the cost of energy and the factors that influence it, the better prepared you'll be to make smart decisions at home and business.
Threat to recovery?
The Lehigh Valley and the nation are slowly regaining ground lost during the Great Recession. The Valley has recovered about half of the jobs it lost and the unemployment rate has dropped. Home sales increased during the last half of 2011 and the beginning of 2012, a firm indication of improving consumer confidence.
Economists expect this will be another year of slow growth. But one of the biggest threats to the economic recovery is oil. A sudden spike, if steep enough, has the potential to cause consumers to recoil and throw the economy back into recession.
"We're already starting to see gasoline prices get higher, and the closer they get to $4 a gallon, the more consumers will react to it," said Ryan Sweet, an economist with Moody's Analytics. "There's nothing harder on a U.S. consumer than a sudden increase in gasoline prices."
Consumer spending accounts for 70 percent of the United States economy. So when people have to spend more money to fill up their cars to go to work, they have less to spend on other things. Demand for gasoline is fairly steady regardless of price because there are few substitutes, and people respond to gas prices more than other products because the prices are so visible, said Kay Smith, a macroeconomics expert at the Energy Information Administration.
"When gasoline prices approach a high, for example when gasoline prices approached $4, consumer confidence took an extra hit down," Smith said. "The reason people do that is it is an energy price that they see everyday. The prices are posted everywhere. You can't get away from them."
But the effect isn't just in the minds of consumers. Every 10-cent increase in the price of a gallon of gasoline translates to a 0.1 percent decrease in disposable income, Smith said, because people cut other expenditures to pay higher gasoline prices.
For that reason, businesses have a hard time planning when fuel prices are volatile. They don't know what their own energy budget will be, and they don't know how much consumers will have to spend for their products.
And it's difficult for government to control. Despite the United States being the No. 3 oil producer in the world, it still consumes more than twice as much as it generates. That means the country is heavily dependent on foreign energy sources. And it faces greater competition as China and other countries demand more of the world's oil.
A stable fuel at home
While oil price volatility poses threats to the economy, natural gas prices have been falling thanks to newly tapped domestic supplies.
Drilling in western and northern parts of Pennsylvania, as well as West Virginia, North Dakota and Texas, is yielding vast supplies of natural gas. The boom is creating jobs and lowering prices for a popular fuel used to heat homes and run power plants.
The big effect for homeowners who heat with natural gas is lower bills. And consumers have reacted by swapping out old oil boilers and furnaces for natural gas heating units that save them money. A typical natural gas heat customer will pay nearly $700 less to heat their home this year than they did in 2008, according to UGI, the Valley's leading natural gas provider.
Electric bills also have dropped due to lower natural gas prices. And the Energy Information Administration estimates domestic natural gas deposits are sufficient to meet demand for years.
That resource, and concerns about safety, have combined to cool enthusiasm for another alternative power supply: nuclear energy. The United States is home to more nuclear power plants than any other country in the world. But low natural gas prices make it difficult to justify investing billions in a competing energy source.
And nuclear reactor meltdowns that followed tsunamis in Japan have renewed concerns about the safety at such plants.
The energy market presents business opportunities, visible throughout the Valley.
Lutron Electronics in Coopersburg, for instance, has come along way from its humble beginnings. Company founder Joel Spira invented the first dimmer-switch to be marketed to the masses in his Brooklyn apartment, delivering a feature to dining and living rooms that was previously available primarily to play producers.
In business in the Lehigh Valley for 50 years, the company helps reduce energy costs in homes and offices with high-tech solutions that adjust lighting based on the presence of people and the position of the sun in the sky.
Especially in commercial settings, where lighting is a major energy drain, the products can provide a return-on-investment within two years through savings, according to the company.
The Valley's biggest Fortune 500 company, Air Products in Trexlertown, has diversified clients in various segments of the energy market. It makes industrial gases used in oil refineries and other gases that are used to manufacture solar panels.
As the world's biggest hydrogen producer, it has a stake in seeing hydrogen-powered cars emerge as a viable alternative to gasoline-powered vehicles. Such cars are available. The biggest hurdle for the market is creating an adequate number of hydrogen fueling stations so people feel they can drive the cars and not be stranded without fuel.
Ways to save
Consumer awareness about energy prices has created entire industries. An Orefield company specializes in conducting energy audits of homes, providing detailed reports that help homeowners make investments in such things as insulation and more efficient appliances to curb their energy costs.
Gas utility UGI has seen a record number of people convert their home-heating units to natural gas due to its lower price. And natural gas has become the region's predominant home-heating fuel.
For homeowners, there are options to fit any budget. You can spend tens of thousands installing solar panels to make your home its own power plant. Or you can spend a few bucks to install energy-efficient compact fluorescent bulbs and watch your electric bill drop.
Other options for consumers, like prepaying for home-heating oil or locking into a long-term contract for electricity at a fixed price, puts them in a position where even energy market experts are uncomfortable. Trying to predict what will happen to the price of energy is a task that baffles even the experts.
And speculative investing by those trying to profit by predicting future oil prices can increase volatility. If investors are bullish on the economy, it can quickly send gas prices higher.
In late 2011 and early 2012, volatility was moderate with concerns about European debt and slowing growth, which brings prices down, canceling out concerns about potential supply disruptions in the Middle East, which can drive prices up, said Bruce Bawks, a research analyst with the Energy Information Administration.
"At least from a volatility perspective, volatility has been down a bit," Bawks said. "The market has just been kind of bouncing up and down depending on the news of the day."