Crude moved higher earlier, as “Investors are looking for a confirmation of their bullish expectations and find it in the news flow from Nigeria,” the Commerzebank analysts said.

The Movement for the Emancipation of the Niger Delta said yesterday that it blew up a pipeline belonging to a subsidiary of Eni SpA. It was the latest of a string of attacks against oil companies. The pipeline, owned by Agip, delivers crude to the Brass export terminal, which has a daily capacity of about 160,000 barrels.

In the natgas arena, the fuel posted a gain on the week, with July futures adding 15½ cents (4%), to $4.032 per million British thermal units.

Source: Crude Drops

Buying shares for income has traditionally entailed investing in sectors that economically aren’t going anywhere.  U.S.-focused investors find themselves owning railroads, trucking companies and electric utilities, not the most exciting of sectors, and most unlikely to grow your investment as a percentage of the global economy.

Even in those so-called “tried and true” sectors, in the modern U.S. economy of huge payouts, stock options and multi-millionaire management, you aren’t likely to get the dividends you deserve. For example, the railroad company CSX Corp. (CSX) yields 1.5%, trucking company J.B. Hunt Transport Services Inc. (JBHT) yields 1.0% and even electric utility American Electric Power Co. Inc. (AEP) yields a modest 4.3%.

All three companies pay out less than half their earnings. The remainder is retained in the company, or used for share buy-backs, to provide capital gains for top management’s greedy stock options. If you can’t get decent dividends from investing in these admirable operations, dividend investing in the United States is a lost cause.

But internationally, income investment is a horse of a different color.

First, international firms don’t follow the Wall Street model of huge salaries, generous stock options and seven-figure bonuses. Less money earmarked for executive compensation means more cash in investors’ pockets.  And that’s a good thing, because international investors have a natural cynicism about retained earnings, believing that money that stays with the company is just management’s to waste. It’s much better to have the excess cash paid out in dividends, to do with, as you like.

Second, foreign markets are growing much faster than the United States. If the local economy is growing at 7% to 10%, even the railroads and electric utilities will grow at a similar pace, providing an increasing stream of profits.

Third, you don’t need to confine yourself to companies growing at the speed of an arthritic snail to get good dividends or sacrifice the capital gains that come from investing in sectors that provide the world’s new ideas, intellectual growth and economic advance. Unlike the technology firms in the United States, some international companies in growth sectors don’t feel they have a God-given right to keep ALL the earnings under management’s control. Instead, they pay out dividends to shareholders.

The international appeal of dividends makes more sense when you remember that many of these companies are still controlled by the founders or their immediate heirs. Large dividends on their holdings are understandably attractive to these rich founding families.

Furthermore, in some countries such as Taiwan, the tax system rewards paying dividends, by imposing an additional “retained profits tax” on companies that keep too much of their earnings without making good use of them.  (The United States had a similar tax from 1936 to 1958, but the management lobby proved stronger than the investor lobby, so it was repealed.)

Internationally, you can find what seems impossible in the United States: Companies in growth sectors, with good track records, that nevertheless pay out good dividends, at least at the 4-5% level and sometimes more. By investing in such companies, investors can have the best of both worlds:

• A substantial dividend that they can live on.
• And the chance of capital gains in the future as the company expands.

It’s almost like U.S. investing in the halcyon days of 1949, when the Dow Jones Index had a Price-Earnings (P/E) ratio of 7% and a 6.9% yield (U.S. Treasuries yielded less than 3% at that time). And while we can’t go back in time, by investing internationally and picking carefully, we can get some of the advantages of an investor in 1949. And even possibly do as well as that investor did during the subsequent decade of Eisenhower growth and stock price rises.

Here’s how to “have it both ways,” when it comes to international income investing:

Administradora de Fondos de Pensiones Provida SA (ADR: PVD), commonly known as Provida, is the funds manager of the privatized Chilean social security funds, a business it has diversified to hold investments in fund administrators in Peru, Ecuador, Mexico and the Dominican Republic. Majority owned by the Spanish bank Banco Bilbao Vizcaya Argentaria with a P/E ratio at 9 times trailing earnings, and a dividend yield of 7.6%, this stock is especially juicy for income investors. Growth will likely come from increases in assets under management, as Chile becomes richer and some expansion of the Chilean pension fund model to other countries.

Acer (Taiwan) (London Stock Exchange: ACID) is the world’s third largest manufacturer of personal computers, with top technological innovation in Taiwan and the ability to manufacture in the cheap-labor rural China. P/E ratio 12 and a dividend yield of 5.6%, plus you get to participate in the growth of the PC industry.

Eni SPA (ADR: E) is Italy’s entry in the “Big Oil” stakes. Because of Italy’s neutral foreign policy posture, it has the advantage of being able to operate in countries like Kazakhstan, Libya and Venezuela where U.S. companies have difficulty. At a price-earnings ratio of only 6.7 with a dividend yield of 6.6%, it currently offers excellent value with chances for growth if oil prices stay high and new oil sources remain attractive.

[Editor’s Note: When it comes to global income issues, Money Morning Contributing Editor Martin Hutchinson knows his stuff.  An investment banker with more than 25 years’ experience, Hutchinson has worked on both Wall Street and Fleet Street and is a leading expert on the international financial markets. In February 2000, as an advisor to the Republic of Macedonia, Hutchinson figured out how to restore the life savings of 800,000 Macedonians, who had been stripped of nearly $1 billion by the breakup of Yugoslavia - and then the Kosovo War. Hutchinson’s “Insights on Income” column is a regular feature in Money Morning].

Source: Insights on Income: You Don’t Have to Sacrifice Capital Gains for a High Yield

And since the situation in Georgia has effectively created a new Cold War status, it’s worth reviewing where the profit opportunities will be this time, and which countries the sensible, geo-strategically conscious investor will avoid – especially since Vladimir Putin looks a lot more dangerous than the sluggardly Leonid Brezhnev.

Danger on the Inside

You probably didn’t have much money in Georgia, Ukraine, or Kazakhstan, the three countries most immediately affected by this.

That’s good. And here’s why:

• Georgia, which had been well run economically, but was too small to be on most investors’ radar screens, has become a very dangerous investment location, indeed.
• Kazakhstan is likely to turn much more hostile to Western investors as it reorients itself towards a newly aggressive Russia. Companies like Italy’s Eni S.p.A. (ADR: E) that had appeared to do well out of their ability to invest in difficult environments like Kazakhstan will watch as that “difficult” mutates to “impossible,” perhaps even losing their proverbial shirts there.
• Only the Ukraine seems to be trying its best to remain pro-Western, with its president, Viktor Yushchenko, flying in to Tbilisi to express solidarity with Georgia. However Ukraine has a presidential election next year – and no prize for guessing who will be trying to influence that election in favor of a pro-Russian anti-Western candidate, by violent means if necessary.

Then there’s Russia itself. Investing in Russia has always been a bit like visiting Las Vegas – but now it’s like wagering large amounts of money in a casino you know to be controlled by the Mafia. You might win, but the downside potential is much greater than the upside.

What’s more, Russia’s tendency to take aggressive action without worrying about Western reactions is likely to cause sharp stock market crashes when it happens, as Wall Street panics and rushes for the exits. And it’s not as if Russia is economically well run; they have done very well since 2000, but entirely because of rising oil prices. At some stage, oil prices will reverse – at which point Russia, with its thuggish approach and expensive military machine, is likely to run out of money quite quickly. As with Venezuela, foreign investors will then be the most obvious people to loot.

Watching and Waiting to Feel the Pain

There are also implications for investors outside these most-deeply affected countries – but those implications are much-less extreme.

Most of the Eurozone is vulnerable to energy blackmail by Putin’s Russia, which has effectively put out of action the oil and gas pipelines that pumped non-Russian energy through Georgia. Moreover, if Russia’s belligerence continues, this new Cold War reality will force EU countries to reverse their current plans calling for minimal defense spending – they will want to protect both themselves and the particularly vulnerable EU members of Eastern Europe (notably Estonia, Latvia and Lithuania, which were part of the Soviet Union in 1940-1991) from sudden Russian assaults.

On one hand, that will put an immense strain on government finances and slow economic growth. On the other hand, such defense-oriented stocks as BAE Systems PLC (Pink Sheets ADR: BAESY) and EADS (Pink Sheets ADR: EADSY) can be expected to benefit.

The United States will also need to boost its defense spending – no matter which candidate wins November’s presidential election, putting a major strain on an already sagging U.S. federal budget, probably leading to higher interest rates and lower economic growth.

Defense industry favorites, especially those oriented towards high-tech conventional war such as The Boeing Co. (BA), B-2 Stealth Bomber maker Northrop Grumman Corp. (NOC) and Lockheed Martin Corp. (LMT) can be expected to benefit accordingly, as these firms did during the 1980s, in the last major military buildup of the Cold War.

Yesterday (Thursday) futures prices for that benchmark grade of crude oil hit the latest in a succession of record highs, punching through the $135-a-barrel mark on the New York Mercantile Exchange, before sliding back.

In other words, in only a single year, crude-oil prices have more than doubled, soaring 115% – and setting 27 separate new records along the way. And while a short-term correction may be in the offing – especially with fears of a U.S. recession ebbing – the reality is that oil prices are nowhere near the end of their run, meaning the United States is really an economic system that’s at the crossroads.

“The market is less worried about the economy and subprime problems,” Tim Speiss, head of the wealth-management arm of Eisner LLP, told MarketWatch.com. “But that’s near-sighted. If oil stays above $130 a barrel, that’s a very significant event and a lot of the sectors of the economy would have to be re-engineered.”

Commodities of all types are at or near all-time record highs. And the impact – on a global basis – has been as starting as it is far-reaching, affecting consumers at all income levels and in every market across the world.

Even so, here in the U.S. market, it’s the price of oil – and of gasoline – that continues to dominate the headlines. Like a junk-food junkie who’s constantly searching for a sugar fix, the U.S. economy is addicted to foreign oil. And because it’s not a habit we’re going to kick anytime soon, U.S. consumers will be forced to live with the heinous consequences.

Given that harsh reality, shrewd investors will look for ways to offset that largely unavoidable pain with some well-placed profit plays. Before we can do that, however, a look at the basics is necessary.

Oil Prices 101

Since 2005, global oil production has remained stagnant, but demand has increased exponentially. Even if American consumers are unwilling to pay $4 a gallon for gasoline, and U.S. demand plummets, global demand will continue to rise.

Eduardo Lopez, an analyst with the International Energy Agency, told The Independent that America’s role as the global oil-price arbiter – the United States consumes one out of every four barrels of oil used worldwide – is dwindling.

“Demand is coming from emerging markets. As long as the [United States] doesn’t collapse, it doesn’t really matter if the mature economies are slowing,” Lopez said.

While the IEA expects demand in industrialized countries to decline by 0.7% (about 300,000 barrels of oil per day) this year, the Paris-based group says oil consumption in the rest of the world will grow by 3.7% (1.4 million barrels a day).

The net increase is due chiefly to the rapid growth in China and India.

Fueling the Fast-Growing Economies of China and India

According to the China Petroleum and Chemical Industry Association (CPCIA), China’s apparent consumption of petroleum byproducts such as gasoline, diesel and kerosene rose 16.5% year-over-year in the first-quarter. Crude oil consumption jumped 8%.

China’s net imports totaled 44.95 million metric tons in the first quarter, up 15%, and net imports of oil products rose by 32% from a year ago, according to the Asian nation’s General Administration of Customs.

And now that the most powerful earthquake in 58 years has ravaged the country’s infrastructure – smashing roads, leveling refineries, and shutting down hydroelectric plants – China has been forced to supercharge its imports of diesel and jet fuel just to supply power generators and airports to help it accelerate the desperate rebuilding process.

Ultimately, the IEA sees China’s oil demand more than doubling to 16.5 million barrels a day by 2030.

But that’s nothing compared to other emerging hot spots, where demand is expected to rocket sevenfold during that same stretch.

Just look at India, another big country with a pedal-to-the-metal growth rate. That country is expected to overtake the United States, Japan, and China as the world’s leading net importer of oil by 2025.

In 1970-71, India was importing 11.66 metric tons of crude oil. By 2005-06, however, the imports had increased to 99.40 metric tons, the Economic Times reported. Since 1997-98, alone, petroleum imports have almost tripled. Nearly 76% of India’s domestic oil needs are met via imports.

And it’s really no wonder: India’s demand for oil is expected to grow by 8%-10% this year alone.

Together, China and India will account for 45% of the increase in global primary energy demand through 2030. The two countries’ net oil imports are expected to jump from 5.4 million barrels in 2006 to 20 million barrels a day in 2030, which could create a “supply crunch” as early as 2015 according to the IEA.

The Pending ‘Supply Crunch’

There’s no avoiding the fact that the world will one day run out of oil. In fact, the biggest field in the world, Saudi Arabia’s Ghawar field, is only a shadow of its former self. It was originally discovered in 1948. And since the 1970s, the oil field has required large-scale injections of seawater – a technique used to artificially pressurize an oil reserve that’s on the decline.

Ghawar isn’t the only spot where this seawater saga is playing out. As the biggest, most-accessible, and most-cost-efficient wells on the planet dry up, oil producers are struggling to replace them.

To do so, they’ve been forced to experiment with challenging and costly deep-sea drilling expeditions. Such heavy-hitters as Exxon Mobil Corp. (XOM), BP PLC (BP), Total SA (TOT), Chevron Corp. (CVX), ConocoPhilips (COP), and Royal Dutch Shell PLC (RDS.A, RDS.B), will spend a record $98.7 billion this year on exploration and production, according to Lehman Bros. Holdings Inc. (LEH).

Exploration costs have more than quadrupled since 2000, as oil producers have been forced to take on more complex projects and the costs of both labor and materials have skyrocketed. In just the past eight years alone, the cost of finding and developing a barrel of crude oil soared from $4 to $18, Andrew Latham, vice president of exploration services at consulting firm Wood Mackenzie Ltd., told Bloomberg News.

What’s more, that result gave a majority to the center-right government of Silvio Berlusconi. Berlusconi, a media billionaire, is pro-U.S. and strongly pro-capitalist. While the forces preventing free-market reform in Italy are extremely strong, he should at least be able to make some improvement in Italy’s economic position, with consequent benefit to the local stock market. While sensible investors have in the past avoided Italy, with Berlusconi in office, it might be worth taking another look.

There’s no doubt that Italy has some weaknesses. By European standards, it is fairly corrupt, ranking 41st on Transparency International’s Corruption Perceptions Index, below the other major European countries (but above such investor magnets as China and India).

Italy has a budget deficit of 3% of Gross Domestic Product, with too much government spending at 50% of GDP, and far too much government debt at 105% of GDP. The country had relatively slow economic growth of 1.9% in 2007.

The home to Rome also has a declining population – not in itself a problem, but since its social security system is generous it creates difficulties in funding Italy’s pension system. It has suffered badly in the past few years from expensive government and expensive labor costs, particularly as it is a member of the euro, which has almost doubled in value against the dollar since 2002.

All this would make you think Italy was a basket case, except for one fact: it has enjoyed very considerable economic growth in the decades after World War II and again in the 1990s. It’s a wealthy country, nearly as wealthy as Britain, France and Germany. And it is famous for high-end design in the clothing and home furnishings industries. Some of Italy’s medium-sized family-owned companies are the best run in the world.

From time to time, investment in the right Italian companies has made international investors a lot of money. With expectations low – the Milan 30 index trades only 30% above its level of five years ago, and on a price-earnings ratio of a mere 11 – and with Berlusconi likely improve the outlook for Italian business, this may well be such a time.

There are only a few Italian companies with full American Depositary Receipt (ADR) listings in the United States – most of firms choose to concentrate on the London market for their foreign capital – but at least a couple of these would appear very interesting investments.

A list of the companies easily investable by US individual investors is as follows:

ENI SPA (E): This firm is Italy’s entry in the Big Oil stakes. Because of Italy’s neutral foreign policy posture, it has the advantage of being able to operate in countries like Kazakhstan, Libya and Venezuela where U.S. companies often have difficulty. On a price-earnings ratio of only 8.4% and with a yield of 5.6%, it currently offers excellent value. Strong buy.

Gentium SPA (GENT): A small loss-making drug company, which has lost investors 67% of their money in the last year. Better pass.

Luxottica Group SPA (LUX): A manufacturer of sunglasses with worldwide operations, Luxottica is a quintessential way to buy into Italy’s superlative design skills. On 14.7 times historic earnings, 13.1 times prospective earnings and with a dividend yield of 2.7%, the firm is also reasonably priced. The only caveat would be that a worldwide recession could badly hit sales of even lower-priced luxury goods. Still, we think it’s a buy.

Natuzzi SPA (NTZ): A medium-sized leather furniture manufacturer, Natuzzi is currently booking losses and pays no dividend, so maybe not.

Telecom Italia SPA (TI): Italy’s main fixed line and mobile integrated telephone company, with a P/E ratio of 11.3 and a historic dividend yield of 10%. However, as those ratings would suggest, earnings dropped 19% last year on price cuts and heavy competition and the dividend is now uncovered. There is also talk of a merger with Spain’s Telefonica. Speculative.

iShares MSCI Italy Index (EWI): And finally, you can buy the Italian market as a whole through this exchange-traded fund (ETF), which has a reasonable market capitalization of $340 million, a price-earnings ratio of 11 and a juicy yield of 5.04%. If you’re excited by the possibility of economic improvement that the Berlusconi election victory offers, that is an attractive alternative. Buy.

Supply problems also contributed to the rally. Royal Dutch Shell’s Capline pipeline, which transports crude from the Gulf of Mexico to the Midwest, was shut down over the weekend after a leak was discovered in Tennessee.

Also, Eni SpA, Italy’s biggest energy company, reported yesterday that sabotage over the weekend caused a fire at oil plants in Nigeria, resulting in a total output loss of about 5,000 barrels a day.