The U.S. is myopic. Despite growing evidence to the contrary, we think the world revolves around us. This extends not just to sports, politics and culture, but to economic factors like crude oil demand. The news that Americans are conserving fuel and driving less - enough to save 1% of fuel demand - made headlines around the world.

But, as it turns out, there's this whole other world out there that doesn't revolve around the U.S. SUV owner. In a move that many consider a turning point for the energy markets, China recently raised the price both of gasoline (17%) and diesel (18%). In response, crude oil prices fell by $4.75 a barrel.

The world markets still are used to thinking of the Chinese economy as an independent unit. English-language reporting continues to focus on China as little more than a demand vacuum, sucking in any and every commodity it can, as fast as it can; there's precious little consideration of the complexity of the China economy itself.

But Chinese companies and Chinese consumers react to the same forces you and I do, so as China moves to raise energy rates, it pays to consider: What affect will rising energy prices have in-country? What's the impact on consumer behavior? How will those effects ripple out into the greater market?

It's The Economy, Stupid

The increase in fuel prices goes alongside a planned future increase in electricity tariffs on July 1. These two key prices will feed an increase in inflation as the Chinese people spend more to purchase goods and transportation - but not necessarily gas. Dong Tao, regional chief economist with Credit Suisse, was quoted in Forbes on Friday estimating that the fuel price increases will raise China's CPI between 1% and 2.3%. The big variable is how high public transportation fees will go up with this new increase. "In our estimation, fuel directly counts for only 3% in [the] CPI basket, but public transportation counts for 5.5%," according to Tao. This makes sense in a country where private car ownership is growing, but still not the norm. In 2006, there were only 30 cars per thousand people. By comparison, in 2006, the world average was 120 cars per thousand. There's a possibility that the combination of higher fuel prices and higher public transportation costs could push China‘s inflation from its current already-high 8% into double digits.

China ain't no Vegas. What happens there definitely does not stay there.

Who Turned Out the Lights?

Beyond the Chinese people, several global industries will be hit hard by the increase in energy costs. Already many businesses are suffering because of inadequate power supply. Power plants buy coal at expensive market prices and then have to turn around and sell the electricity they generate at set government prices. Many times the power plants can't meet demand, and power outages are a fact of life in Chinese commerce.

It's the aluminum producers that we're guessing are among the hardest hit. As we cover in our article on base metals, a huge portion of the cost of aluminum is energy-related (up to 40%), so any increase leads to shrinking margins or price increases. On Friday, China's largest aluminum producer, Aluminum Corp. of China Ltd (Chalco), announced production costs would be rising up to $43 per metric ton. In fact, rising costs combined with severe storms in the first part of the year are blamed for the huge drop in Chalco's profits for the first half of the year.

The price of aluminum on the London Metal Exchange has been rising in the past week.

LME Aluminum Contract - Cash Buyer Price Curve June 1 To June 22

As it stands now, there is plenty of aluminum around - stockpiles have been rising since November of 2005 and are at their highest since mid-2004.

Will prices rise enough to keep the Chinese smelters solvent? Or will they decrease production due to power shortages or high costs? This combination of factors - fat inventories, rising costs, rising prices, plus the metals fungibility with copper for many uses - makes me think we're headed for an unstable and unpredictable market for aluminum for the near future.

Another note: If aluminum production falls in China, there are other areas with the natural resources and potential power supplies that will be looking to fill the gap.

Many companies are looking to Africa - a place rich in extremely high-quality bauxite deposits and the potential for large hydropower plants - as an up-and-coming aluminum-producing area. While the infrastructure and political stability may not be in place now, many companies are investing in the area with an eye to the future. While there are many plans, there are also a lot of delays (caused by power shortages and higher-than-expected costs).

China and Africa - strange bedfellows indeed.