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With oil prices falling, O.P.E.C. weighs cuts

Ministers of the Organization of Petroleum Exporting Countries meet Tuesday in Vienna and may unofficially ease back on production levels that are above OPEC quotas.

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Now, he says, "It's much easier for them to allow production to slip than to agree to a formal quota cut, which will be looked upon as an aggressive, hostile action by the West.... They have a lot of flexibility to slowly, quietly, invisibly let production slip."

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OPEC is looking at the strategic implications of its decisions in context of a global economic downturn, the run-up to the US presidential election, and long-term stability that will ensure future market growth.

"Some of the bigger members like the Saudis are very concerned that inventories might build excessively, and that might suppress demand further down the road," says Mike Lynch, an Amherst, Mass.-based oil consultant and head of Strategic Energy and Economic Research.

The primary divide is between US-allied Saudi Arabia on one side, and Iran, Venezuela, and Libya on the other. All three have limited production, and anti-Western political agendas. But Venezuelan exports are down as domestic demand increases, and Iran's exports, too, are limited.

"We believe the market is oversupplied," said Gholam Hossein Nozari, the oil minister of Iran, OPEC's No. 2 producer. The chair of Libya's National Oil Corp. told the Associated Press on the eve of the OPEC meeting: "There is a glut in the market that warrants creating order."

"It's part business, part politics," says Mr. Lynch. "The Saudis will be saying maybe the price is too high, and market share is shrinking. And the Iranians and Venezuelans will have no trouble saying: 'Oh, no, we really need to stabilize prices at these levels, and besides you are just running-dog lackeys of the Great Satan.'"

Iran is the only oil exporting country that has witnessed serious economic problems despite unprecedented oil revenue. Inflation was reported this week to have officially hit 27 percent, and President Mahmoud Ahmadinejad has come under fierce criticism for rampant spending and economic mismanagement.

"Every $10 rise in the oil price is $7 billion of additional revenue in the Iranians' hand, which the US and the Saudis have to be a little bit nervous about," says Goldstein.

As the de facto leader of OPEC and the member with the most over-quota capacity, Saudi Arabia has "more leverage" than Iran or Venezuela, says Goldstein, and will use it to "make sure they have a stable, predictable, large-size market for an inordinate period of time."

And while US, European, and Asian consumers have grown accustomed to the high prices, there a many signs that they have taken steps to conserve, as if the price were not going to fall again.

"The reality is there is a psychological element, but there is also just the economic calculation which is, [even] at $80 per barrel, it makes sense to buy this slightly smaller car [or] to put in a more efficient burner," says Lynch. "So if it drops below $100, it's not like everyone is going to go out and buy a Hummer."