On the latter front, misconceptions continue to rule, driven by assorted politicians looking for scapegoats. The notorious “speculator” gets blamed, and oil companies are once again accused of myriad wrongdoings.

Blaming Big Oil resonates better with the majority, and now oil companies are easily blamed for pocketing big profits while the average consumer struggles to make ends meet, at least energy-wise.

But, as is often the case, the reality is somewhat different than the media’s portrayal. In developed economies, taxes represent a larger portion of revenue for each liter of oil than the “wicked” oil companies’ profits. The chart below, courtesy of the Organization of the Petroleum Exporting Countries (OPEC) research department, clearly demonstrates that taxes represent a big part of the picture.

OPEC usually gets the bigger piece of the pie. It’s the organization’s oil, after all. Taxes represent an even larger slice in the UK than the portion OPEC receives. The US applies fewer taxes than the rest of the major economies, although it’s still rather substantial at 26 percent, versus the amount the industry gurus receive.

The world simply can’t produce more at this point. And though oil producers naturally favor elevated prices, there is a point at which they become too high. Concerned customers should question how their governments spend these taxes rather than waste their time consumed in baseless conversation.

Source: Organization of the Petroleum Exporting Countries

In the developing world, higher oil prices are also a serious issue because the population is generally poorer and economic growth is strong.

China, India and the Middle East account for about 80 percent of global oil demand growth. But China and India–the major economic growth engines of the world–consume 8 million and 2 million barrels per day, respectively. And, given their respective populations, those numbers are quite insignificant.

Regarding consumption, the aforementioned numbers are important. Even if Asian countries as whole slightly reduce their oil intake, this will do little to calm demand because they don’t amount to much in absolute numbers.

On the other hand, because of their economic growth needs and their overall approach to social stability, they’ll continue to also subsidize oil prices. The majority of Asian countries subsidize oil prices through several different channels, and quite a few also have high taxes, such as India. The Philippines, on the other hand, stands on the opposite side of the spectrum because the country has no oil subsidies.

Enter economics, and the situation gets more complicated. Higher oil and food prices coupled with subsidies aggravate inflation and endanger economic growth. As a result, Malaysia, India, Taiwan and Indonesia have announced a rise in retail fuel prices that range from 10 percent to 47 percent.

The big question now: Will China follow their example?

Although Chinese officials would like to oblige, they’ll likely pass for the time being. Oil meets only 20 percent of China’s energy needs. And the last thing the Chinese economy needs at this juncture is one more inflationary concern. Furthermore, China is in a superb position to continue to subsidize because it has one of the lowest government debt levels and a negligible fiscal deficit of 1 percent of GDP.

As a result, expect the Chinese to follow their gradualist approach on this issue and ease retail oil price increases gradually. This approach will soften the shock in the economy. On the other hand, waiting an hour to fill up your tank at Chinese gas stations is quite common. How much will a price hike speed things up?

The Fresh Money Buys, listed in order of preference, also should fare well in the oil situation. Starting with Russia and moving down the list, I expect these countries to benefit or, in the very least, effectively deal with higher oil prices. The Indian economy, however, is more sensitive to higher oil prices. But our focus is the pharmaceutical sector, and we should be able to bypass this problem. 

I offer a fund allocation guide using the Fresh Money Buys. Occasionally, I also suggest asset allocations that I believe could perform better than the overall market. And, if the hedges are included, I expect they’ll produce positive results.

Keep in mind that cash isn’t an option for the Silk portfolios, and individual investors should consider the advice offered here in the context of their personal risk tolerance and investment goals.

Silk’s investment advice is always long term in nature, although I always try to avoid big portfolio losses in the short and intermediate terms. Here are the suggested allocations as we approach the end of the second quarter.

Allocate 60 percent of your funds in stocks according to the recommendations in the Silk portfolios, divided equally among Asia-ex Japan, Russia and Japan. Again, this can be adjusted according to your investment characteristics.

Allocate the remaining 40 percent in the portfolio permanent hedges as follows: 15 percent in gold bullion or SPDR Gold Trust (NYSE: GLD); 10 percent in longer-term US Treasuries, iShares Lehman 7-10 Year Treasury (AMEX: IEF); 10 percent in the short on the US consumer, Consumer Discretionary SPDR (AMEX: XLY); and 5 percent in corporate credit, iShares Investment Grade Corporate Bond Fund (NYSE: LQD).

Three weeks ago, I recommend shorting HSBC Holdings (NYSE: HBC). The main argument for the trade is that HSBC holds 63 percent of its loans in the US and UK, and its stock hasn’t suffered nearly as much as the rest of the global banks.

I still expect it to be hit in a downturn, and it’s a good hedge to our long positions. If you’re in the trade, place your stop at USD94. You can also enter the trade now using the same stop/loss of USD94.

The investment process is constant. So if you’d like to add to your positions in portfolio recommendations or allocate new funds in a diversified way, focus on the following markets, in order (for both countries and sectors). Consult the Portfolio tables for details.

• Russia (energy, telecommunications)
• Hong Kong (banking, real estate, infrastructure)
• India (pharmaceuticals)
• Japan (banking, insurance)
• Taiwan (ETF)
• China (consumer, telecommunications, port, machinery, oil, e-commerce, coal)
• Philippines (telecommunications, real estate)
• South Korea (banking)
• Singapore (banking, telecommunications, industrial)
• Cambodia (casino/hotels)
• Macau (casino/hotels)