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China's a growing economic power, no question about it. It's economic growth is unprecedented in modern history. You'd have to have been doing your Rip Van Winkle impersonation for the last decade not to know about it. This dramatic expansion of the Chinese economy has affected us on several fronts, and will continue to do so for the foreseeable future. How will it affect you, your retirement planning, and your future economic well being? Here are some thoughts on the subject.

First, the average urban income in China has increased six fold in China since 1990, according to the official the Chinese government statistical yearbook. To magnify the importance of this growth, not only in is the income of the average Chinese city dweller increasing by leaps and bounds, but the majority of China's population growth is now occurring in the cities. Over 3 million new residents found their way into Chinese cities last year alone. This upsurge of relatively affluent city dwellers want to become consumers as is the case in much of the rest of the world. Repressed consumerism is hard to contain, and like any other natural force, it will eventually escape.

These new Chines consumers want to buy things alright, and one of the most sought after items in China is a new vehicle. Naturally, this burgeoning market has attracted automakers from all over the world like ravers to a free bowl of X. Obviously these new automobiles and shiny SUVs will consume fuel. What many onlookers fail to account for is not only the additional fuel consumed by the Chinese motoring public, but the added petro products consumed in one of the fastest growing Chinese industries, building all those new cars.

Not only that, but once they're built, they need somewhere to drive. China has embarked in a massive road building program. A Congressional Budget Office report on China compiled in April of 2006 indicates that the number of highway miles in China has increased by almost 100% in the last 20 years. Many of those roads are very petroleum intensive to build, requiring asphalt for the pavement and diesel for the road building equipment. The CBO report also indicates that there are sure to be plenty of new drivers for all those vehicles, as the number of new Chinese drivers has increased by a factor of 6 in the last 15 years, and the rate of growth in new drivers is actually increasing.

As you're doubtlessly aware, a preponderance of the new stuff lining the store shelves at the local CostWalget hails from new manufacturing plants in China, much to many people's chagrin. The production of these trinkets and plasma TVs eats oil at a prodigious rate. This is due not only to the energy required to actually produce the products but the majority of them contain a high percentage of plastic. For those of you that think that the rising price of oil just makes it more expensive to get to the store, think again. Most plastics are composed primarily of petrochemicals, so increased production of plastic products will naturally increase oil consumption. Factoring in all of the above, Chinese oil consumption is now over 7.5 million barrels per day. This is up from about 2 million in the early 1990's. If the present rate of growth continues, and there's nothing to suggest it won't, that will be up to about 16 million barrels by 2020, and pass the U.S. soon afterward.

So, what could all this mean to the rest of us and our economies? Well, if you are invested in companies that build products for sale in China, or services that are provided to Chinese, you could stand to do very well indeed. According to the 2006 U.S. CBO report on the subject, if the cost incurred by the increased Chinese demand were to be passed on to consumers, that alone could cause gasoline and diesel prices to rise by an average of $.24/gal. Light oil products, such as gasoline, petrochemical feedstocks, and diesel, are more expensive to refine than lower grades of oil products. The Chinese demand for these grades is growing even faster than the demand increase for oil as a whole. That could cause even further price increases if worldwide refineries have trouble keeping pace. In the U.S, policy concerns and damage to refineries caused by fires and hurricanes are pressuring refineries to produce even more form existing facilities. Hobbled by an inability to increase capacity through new refineries (if you've ever tried to get a building permit for a house in most of the major cities, you can just imagine how tough it would be to get one for an oil refinery) we'll likely have to look to foreign refining capacity to meet increased domestic demand.

The increase in petro prices in the U.S. will cause an entire range of consumer goods to increase in price, even as more of these goods are being made in China. Chinese consumer goods production actually serves to depress consumer goods prices due to their ridiculously low labor prices and modern production facilities. So we'll have more expensive consumer goods, and increased costs of bringing those goods to market, due to increases in fuel prices.

It's ironic that the very thing that is giving us these cheap consumer goods is one of the primary factors in the increasing fuel prices. If you purchase few Chinese made consumer goods, you effectively get stung much worse. This is because you're not benefiting from the lower consumer goods prices, but are paying high prices at the pump and on any products that are transported or made using petrochemicals. If you save money by purchasing inexpensive, Chinese consumer goods, you offset some of the price increases you're facing at the pump and elsewhere.

The whole subject of capital flight to China and the increased trade deficit with the Chinese is the subject for another day. If we'd open the gulf and the arctic to increased oil production, we could offset some of the trade deficit by supplying the Chinese with the oil they desperately need. In order to accomplish this however, we'd need to drastically reduce our domestic consumption, something the conservationists would relish. In fact, while it would be a great thing to reduce our oil consumption, our growing population is likely to make that difficult, even if we drive more efficiently and in more efficient vehicles.

Domestic initiatives to switch to alternatives such as ethanol have some merit, but while these could decrease our oil consumption, they'll do nothing to decrease our fuel consumption because these fuels have less specific energy content than gasoline. Most vehicles actually get substantially (20%-25%) worse fuel economy running E85 than running gasoline.

So the upshot is no, it won't doom the rest of us, you will pay more for almost everything though, even the Chinese stuff, because of the increased Chines demand for crude. You could, however view this as an opportunity. There'll be investment opportunities in firms that supply that Chinese economy. You just need to nose around a bit to find out where. Stay tuned...