It influences investments businesses make in new equipment and technology. And it creates opportunities for companies that either provide energy or help conserve it.
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.