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OPEC Ponders Production & Prices

The Organization of the Petroleum Exporting Countries (OPEC) logo is pictured at its headquarters in Vienna, June 10, 2014.

Members of the OPEC oil cartel gather in Vienna next Thursday to consider what action to take following a sharp decline in the global price for their product. Cutting production could help bolster prices. But lower prices might discourage competition from oil drillers with new technology and higher production costs. A key oil analyst says it is very difficult to predict what OPEC will do.

The debate and discussion of oil production levels and prices began long before the official meeting as key officials of two major oil producers, Saudi Arabia and Russia met in Moscow.

Russian Foreign Minister Sergei Lavrov, pledged to continue consultation and cooperation, and said market forces should set prices.

"As far as the situation in the oil market, our and Saudi Arabia's position is that the price should be determined by the market, where supply and demand play a decisive role. And we and our Saudi partners are against the market being affected by some political or geopolitical schemes," said Lavrov.

Russia's economy has been hurt by falling prices and economic sanctions.

Economists say global oil prices dropped because faltering economic growth, and greater energy efficiency have cut demand for energy. At the same time, the supply of oil has grown significantly as U.S. drillers have expanded use of fracking, a technology that helps them retrieve oil that is unrecoverable by simpler, cheaper techniques.

But the higher production costs for some U.S. oil means drilling companies could be hurt if the price of crude falls below the cost of extracting oil from the ground, according to former presidential economic advisor and University of Chicago professor Austan Goolsby.

“On average, I would say that, once you start getting below a sustained $75 a barrel for oil, there would be a lot of domestic producers in the U.S. who say we can’t live at that sustained price. If the price went to $65 a barrel, and stayed there for several years, a lot of guys would go out of business," said Goolsby.

Saudi Arabia can produce oil relatively cheaply, and some analysts say the Saudis might not cut production in a bid to let falling prices discourage competition and take a greater share of the market.

But a key oil market analyst at Strategic Energy and Economic Research says low oil prices will probably only hurt the riskiest and most expensive oil production projects. Mike Lynch says if companies back away from some investments, it will cut demand for oil equipment and workers and that will lower costs for other producers.

While Lynch says it is incredibly difficult to predict what Saudi Arabia and other OPEC members will do, he expects to hear a call for members to stop producing above previously agreed quotas. And he says, the cartel could go a little further.

"There is a decent chance that you will see, a small quota cut like half a million barrels a day, maybe a million barrels a day, and most of that will be borne by the Saudis, this would mean some price stability, in the near term, around where we are now, 75 to 80 dollars. But I think if the meeting just breaks up with people denouncing each other, then we will see prices start to slide again," said Lynch.

The International Energy Agency says the world currently consumes more than 93 million barrels of oil a day. OPEC supplies about a third of the total.

A new report from the Fitch rating agency says lower oil prices will help economic growth in most Asian nations including Japan, China, Korea, and Thailand. Lower prices means substantial amounts of money that had been buying imported oil can now be directed to other uses.