that case, would it? Such a small incremental increase in concentration. Mr. MAX. Oh, it might very well. It would depend on what brought it about. If it were a combination of two firms, number 49 and 50 having, respectively, 1.75 and 0.75 percent of the market, one might be genuinely unconcerned about it.

On the other hand, if this represented an acquisition of a firm having 2 percent of the market by a firm having 40 percent of the market, then I would be concerned about it. You view it in terms of the trends and so forth and so on. They might not be concerned. That is not to say they should not be.

Senator ABOUREZK. No, I understand that. What are some of the factors which inhibit nonoil capital from flowing into coal production, in your view?

Mr. MAX. I really do not think I can add anything to what I said earlier in that regard, and it is really an area in which my expertise is close to zero, if not zero.

Senator ABOUREZK. Now, if Congress were to make a policy decision to prohibit, what you call, energy mergers, do you think it would significantly depress competition?

Mr. MAX. I am not sure I have the question straight, Senator.

Senator ABOUREZK. If you made this policy decision that we are considering here today to prohibit intercompany mergers of alternative fuel sources, do you think that it would significantly depress competition?

Mr. MAX. I do not know whether it would or would not. I think that it would have that potential danger.

Senator ABOUREZK. You do not know, though, for sure?

Mr. MAX. I do not know, and I do not know how anyone can know with certainty.

Senator ABOUREZK. Would you say the real world being what it is that this policy that we are discussing here today, would, at least, improve the chance of other energy resources to be developed along somewhat less concentrated lines?

Mr. Max. I think it probably would, but I think the alternatives that I have suggested are preferable.

Senator ABOUREZK. Mr. Bangert?

Mr. BANGERT. Mr. Max, the only thing that I wanted to clear upthe one positive proposal that you had for legislation was adopting something similar to 105C of the Atomic Energy Act. That might be all right for future acquisitions, but would not do anything in terms of those acquisitions that have taken place as of now. Is that correct? Mr. MAX. That is correct, Mr. Bangert.

Mr. BANGERT. So that would not really solve the problem as far as the status quo that we do have?

Mr. MAX. That would not. That is correct.

Mr. BANGERT. Thank you.

Senator ABOUREZK. Mr. Chumbris?

Mr. CHUMBRIS. Thank you, Mr. Chairman. You brought up the Kennecott-Peabody case.

Mr. Max. That is correct.

Mr. CHUMBRIS. And I have followed, because of our work here with the subcommittee, that Kennecott-Peabody case since its conception. Relating to the question of capital coming into the market, as I under

stand it, it has been at least 2 years now since the FTC has ordered a divestiture of Kennecott Copper and Peabody. I understand that there have been several bids that have been submitted to the FTC for approval by the Commission of that divestiture, and, thus far, the FTC has not accepted any of those plans.

And I understand further that even some of the people who considered acquiring over Peabody from Kennecott Copper withdrew their bids primarily on the basis that to obtain the capital, it just was not there for them to obtain it.

Is that an indication then of the problem that the chairman has been trying to ascertain at this hearing; which is an excellent question because that is a question we had in our hearings last year with pipelines under the Hart bill, S. 1167, because if they are divested, is there capital and is there the ability to raise money from stock and bonds, and so forth, to take over the divested pipeline. So the problem appears to be a real one rather than an illusory one.

Mr. Max. It is, I am sure—and I have not followed the divestiture aspects of that case as carefully as you have, Mr. Chumbris-but it is my understanding that there are still bidders or at least, have been bidders outside of the energy field who are genuinely interested in making that acquisition. Whether it is a matter of price or whatever, I just do not know the details.

Mr. CHUMBRIS. Well, one of them is the TVA authority.

Mr. MAX. Right.

Mr. CHUMBRIS. Hearings have been held by the Senate Public Works Committee within the last year or so on that subject. And that subcommittee is very much interested in that project.

Mr. MAX. I believe there are some utilities also that are interested in making that acquisition. Am I not correct? Some private utilities? I had heard that. I do not know the details.

Mr. CHUMBRIS. Well, there are the three bids that are pending, I understand, before the FTC.

One other point you were discussing with the chairman and that is the relationship of the price of oil and the price of coal.

Back in January 1957-which actually was the first hearing that I attended as a staff member of this subcommittee-a hearing was held because there was an increase, I believe, of 30 cents a barrel of oil, which the oil companies asked for. The subcommittee thought that perhaps the 30-cents a barrel increase was put, not because of the costs involved and the need for the price increase, but because of the crisis created by the closing of the Suez Canal in 1956 and the problems related thereto.

Then we go on to our oil import quota hearings in 1969, where Dr. Adelman pointed out that the $2 a barrel imported oil was going to drop to $1.50 and even possibly, $1.40. We know, that starting about late 1973, imported oil prices started moving up, and in 1974, reached as high as $11, $13, even $19 a barrel, and I think it was $21 a barrel on an auction bid. That has really helped to create the problem we face today.

Mr. MAX. Yes, no question.

Mr. CHUMBRIS. So it is not the lack of competition or whatever it inay be. It is the high-priced Middle East oil and the high-priced oil in South America resulting from action in the Middle East on oil, that is creating the problems that we face here today in this energy crisis.

Mr. MAX. That certainly is a part of it. It is a very, very complex question, and I do not pretend to have all the answers. I do not know that anyone yet does. I know there are several people who are very, very concerned about it, including the FTC, as I understand it.

But I think that the last chapter of that story is quite a way from being written right now.

Mr. CHUMBRIS. And, of course, some of the problems have been whether Congress legislated properly on the oil import quota; whether the administration acted wisely in keeping a lid on natural gas, in the entire 12-year period, of 12.3 cents per thousand cubic feet. All of those factors had come into the picture.

Mr. MAX. There is no question.

Mr. CHUMBRIS. Thank you, Mr. Chairman.

Senator ABOUREZK. Thank you. Now, Mr. Max, I want to express my gratitude for your excellent statement and the forthrightness of your answers. We appreciate your appearance here today.

Mr. MAX. Senator, I appreciate it. I enjoyed it thoroughly, and I thank you very much for your courtesy.

Senator ABOUREZK. The next witness is Dr. Paul Davidson, who is professor of economics and associate director of the Bureau of Economic Research at Rutgers State University of New Jersey. Dr. Davidson, I would like to welcome you.

Dr. DAVIDSON. Senator, I have prepared a written statement-about 24 pages-and I believe you have copies of it.

Senator ABOUREZK. Yes; we do.

Dr. DAVIDSON. I will just sort of summarize the major points and then

Senator ABOUREZK. We will insert the entire statement in the record.1 And it will give us more time for questioning if you do summarize. Dr. DAVIDSON. Fine.

STATEMENT OF DR. PAUL DAVIDSON, PROFESSOR OF ECONOMICS AND ASSOCIATE DIRECTOR OF THE BUREAU OF ECONOMIC RESEARCH AT RUTGERS, THE STATE UNIVERSITY OF NEW JERSEY Dr. DAVIDSON. I should start out by pointing out that my interest in the oil and gas industry started when I was the assistant director of the economic division of Continental Oil Co. in 1960. And, apropos of an earlier comment that you had made about Continental Oil Co. and Consolidated Coal, you have got to remember not to think in 1975 terms about 1960. Continental was one of the first companies to consider itself an energy company in a period of time when most people were still thinking of themselves as petroleum companies.

The acquisition of Consolidated Coal was thought on by many people in the industry as a sort of crazy move. We had acquired, in the late fifties, a very astute manager who is a Harvard Business School professor who recognized the importance of price elasticities and substitutabilities, and how profits are generated by these economic factors. We were one of the first companies to think in terms of conglomerated energy companies.

I think it was not malevolence on the part of the Antitrust Division. They were reflecting what was probably the prevalent view of the

1 See p. 74.

1960's that conglomerates in the energy industry was not bad. After all, coal companies were not doing very well at that point of time.

Since my experience with the Continental Oil Co., I have gone back to academia, but I have continued to be an expert witness in front of the Federal Power Commission.

In the last few years, I did a study for the Ford Foundation's energy policy project on the relationship of price incentives to oil and gas supply. As a member of the Brooking's Economic Panel, I was a senior investigator on a study entitled "Oil: Its Time Allocation and Project Independence." Both of these studies have been published.

What I would like to do in this statement is to give the results of these investigations on the current energy problem, and particularly on the question of the competitive environment in the markets for the production of energy sources.

First, however, I think it is important that we understand what the energy problem is. This is an industry that has, for over a century, been plagued by potential oversupply of fossil fuels at existing market prices. In terms of ultimate supplies of indigenous fossil fuels, there is no danger that the United States will be depleted in the next century even if present demand trends were to continue. Moreover, Western Europe is probably going to be self-sufficient by 1980. In other words, there is no danger that the free world will run against a Malthusian Constraint in the foreseeable future.

The energy crisis does not mean the age of "cheap" fossil fuels are over; at least, in terms of the economic real costs of finding and bringing these fuels up. Nor does it mean, on a worldwide or North American basis that large increases in market prices are necessary to bring additional reserves forward.

To give you an example, between the years 1962 and 1972, where the world price of oil was not rising, world consumption of petroleum increased 107.4 percent while world crude oil proved reserves increased by 108.5 percent.

For the world, we were no greater running out of fuel in 1972 than we were in 1962. What had happened was that the distribution of proved reserves had changed considerably away from the North American continent to the Middle East. That did not mean that the North American continent was running out of oil, but it did mean that a rational producer, who could afford to invest time and money, would find cheaper reserves per dollar of investment in the Middle East than the more expensive reserves of perhaps $2 to $3 a barrel costs— of oil in the United States or North America in general.

The redistribution of reserves is a function of the cheapness in the Middle East vis-a-vis North America.

We still had development in the United States-new reserves being found-because of the isolation of the U.S. market via import controls, the Connally Hot Oil Act, et cetera.

The energy crisis then is really a question of at what price are the American consumers going to get their energy needs filled.

Neither oil industry spokesmen nor academics deny that there is plenty of domestic energy as well as foreign energy sources. The question merely is at what price. We are not running out of oil, or coal. or any of these other fuels.

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My Brookings study suggested that if we could get the certain governmental policies which would reduce the degree of monopoly in the domestic industry back to where it was in 1971, we could have Project Independence at somewhere between $5 and $7 a barrel, in 1974 dollars, by 1980; but this requires a whole series of policy decisions and legislation.

There is a tremendous amount of evidence that suggests that at current controlled prices there is withholding of production by private and public decisions in order to enhance returns to producers and royalty owners, and in the belief that decontrol will soon occur.

Let me just give you one-there are a whole bunch of items listed in my prepared statement. Since they are not involved with the particular bill, I do not want to take the time to discuss them all, but just one of them which shows the problem.

Point (b)1 cites testimony given by FPC economist David Schwartz in which he pointed out that they found that 13 pipelines had indicated that they are taking no production from leases which have been dedicated to them under contract.

As long as gas cannot be flared, and as long as gas and oil are found together, if the pipeline refuses its daily take, then you cannot produce oil from the well. So right there you have a problem of conflict. Why were these pipelines not taking natural gas in the period of a natural gas shortage? To the extent they are not taking natural gas, they are creating a shortage of oil to the extent these two come up together in any of these wells.

It is this kind of interaction between the producers of various fossil fuels which I want to emphasize at the present time. I will skip over some of this other evidence, and go on to where I suggest that a national economic policy must be made of a number of links. One of the most important ones, it seems to me, is the extension of antitrust action to break up conglomerate energy companies, and to create competitive alternative sources of fossil fuels. This is the bill that we are presently discussing, and it is only one link in an energy policy. I think that it is an important link and one that though the payoff is not immediate, it will provide more important payoff in 4 or 5 years.

The other implications, which I will skip over, include not decontrolling, and perhaps even forming a Federal oil and gas corporation. Move on to the question of the Hart-Church bill for import auctions. Again, this bill is a useful attempt to create a more competitive environment.

The OPEC nations at the present time have the multinational oil companies as the marketing agency which makes sure that there is production coordination at the going price. The Hart-Church bill, it seems to me, is an important coordinating factor for consumers.

If we do nothing, then it is clear to me that the price of oil in the United States will be in excess of $11 a barrel by the 1980's as the sheiks on the Persian Gulf set the price. The OPEC cartel will not unravel of its own accord. We are in an economic war involving the distribution of the world's wealth, and it is this that we must fight. Once we understand that, we can take on the OPEC cartel and the domestic situation.

1 See p. 76.