ready and presumably plan to do under the synthetic fuels program, equally large amounts of money to help them take over the next generation of energy. That doesn't make sense.

If we are going to us public funds to make or insure or guarantee or otherwise subsidize or help the creation of our next generation of energy, the first overriding criterion ought to be cost effectiveness, which also hasn't been mentioned very much in those discussions, and the second overriding criterion ought to be that our children and grandchildren get a more competitive energy industry than we have. If the public funds are going to go into creating that industry, then the public has a right to demand that that industry be competitive and, therefore, that we use those public funds to bring in new participants to decrease concentration rather than to give those funds to the old participants to consolidate their hold over the industry and increase concentration and anticompetitive relationships.

Ms. JOSEPHSON. I would like to identify myself. I am Jessica Josephson, counsel for Senator Bayh. I want to continue some of his questions for a few minutes.

You have discussed some of these problems before, but I would like you to answer this particular question. The oil companies are spending a lot of money on nonenergy acquisitions. Why are you so certain that forbidding those kinds of acquisitions could lead specifically to more energy production?

My second part of that question, is it possible that the major sources of oil have been exhausted and that the oil companies are diversifying to simply avoid extinction?

Mr. FLUG. Well, I don't think the oil companies are in any danger of extinction, certainly not within our lifetime. The fact is, and they say so themselves, that there is plenty of oil exploration and development to do. The amount of money that they themselves say they need to do this exploration and do it on a fairly rapid basis is such that this money that is going to buy up the Montgomery Wards can well be used for that purpose.

Just to take the Outer Continental Shelf as one example, the pace is so casual as to be, I think, criminal. We have filed suit in fact because we think the leasing system is encouraging and allowing that kind of pace of development-and clearly, if this money were not being spent in buying up other companies, there would be ample opportunities to spend it in oil and gas development.

If they dont believe there is money to be made in oil and gas development and that there is not additional oil and gas to be found, then they ought to say so and we ought to stop giving them incentive prices to find oil and gas. They can't have it both ways.

If they want the incentive prices to find oil and gas, then they have to spend the money on finding oil and gas. The fact is, I think, that they have not done so because they have been waiting for decontrol, because that helps bring about decontrol, because they want to do as much as they can abroad because of the political instability abroad and their unsureness of how long they can continue making the kinds. of profits that they are making abroad, which for any of the companies are even higher than the very substantial profits they are making here.

So there is ample use of that money here. There is one other fact. I think it was Senator Hatch who said that this inventor, who came up with the process that Exxon got for improving the efficiency of the electric motors, couldn't get any help anywhere else and then finally came to Exxon and he was able to get help.

I think to some extent the likelihood and ability of the oil industry taking over other companies or other technologies acts as a deterrent to some of the other companies against getting into those businesses. I have had businessmen say to me that they feel that part of the reason that other big businesses have not gotten actively into the energy field-into the alternative energy field, into the energy efficiency fieldis a general desire not to rock the corporate boat, not to destabilize the business roundtable, not to muck around in each other's fields.

To some extent that overhanging ability of these giant companies to buy up everything in sight acts as a deterrent to nonoil companies from doing some extension of their own, from getting into some new fields, especially energy efficience or alternative energy types of fields.

If you pass a law like this which absolutely prevents that from happening, the other companies can feel that they can take those risks without finding themselves the next day facing an oil company which has really the power to knock them out of the box.

Ms. JOSEPHSON. Further along those same lines, can it not be said that diversification creates stability which guarantees the flow of capital generally, and isn't that diversification stability essential to be able to afford oil and gas exploration in the long run?

Mr. FLUG. Well, since in most of these cases that I have seen the diversification has operated as a drag on the return on investment, certainly of their oil and gas exploration and development. I don't see that that argument holds much water.

Oil and gas are going to be very, very, very profitable for at least another generation. I don't think there is any doubt about that. For these companies to somehow argue that going into Montgomery Ward, to come back to that example, somehow stabilizes their oil business, to me is disproved by the relative profitability of those endeavors.

If anything, it warehouses some money for a while until they decide for one reason or another to bring it back into domestic oil and gas development, and that is certainly not in the public interest.

Ms. JOSEPHSON. One last question, Mr. Flug. Do you believe the oil companies represent a group "whose interests are adverse to those of the Nation?"

In this time of energy crisis there are those who would say the same about environmentalists or even consumer groups. Isn't the point really that no group in our economy or society should have undue influence, that we should preserve as much as possible as system which is diverse and pluralistic?

Mr. FLUG. Well, I certainly believe in the adversarial components of our system. I believe that every group should have its voice heard on that particular point. I think this is a heck of a week to be discussing that subject when we have had full-page ads from Gulf, Exxon, and Standard Oil of California in newspapers throughout the country reflecting their point of view on these issues.

Mark Green has observed the very limited ability of those who seek and purport to represent the general public to respond to those ads. Just to respond to all the mistakes in the Gulf ad alone would be a full-time job for somebody for a week. We have someone working on it. But we can't respond to everything.

So as far as equal voice goes, I don't think we have to worry about the oil industry getting its message across, not to mention the 300 lobbyists and the 900 lawyers and 600 vice presidents and so on that float around this town and the country.

On the question of whose interests ultimately has to prevail, I think that is an important point. We met with Secretary-designate Duncan last Saturday or the Saturday before, and when the meeting ended one of his aides said, "Well, you'll see. Secretary Duncan is going to balance the interests, and he is really going to be able to get a consensus." I heard that and I shook my head. I said, "That is not the Secretary's job." You cannot balance the interests. You don't balance the interests of the oil companies against the interests of the public. The job of a public official is to discern and determine for himself or herself what the general public's interest is. If that means that the oil companies are not going to get everything they want or even half or a tenth of what they want, that doesn't mean it is not in the public interest. The oil companies always aspire to get it all. Now they are entitled to make a reasonable profit. They are entitled to have a return on investment. But they are not entitled just because they ask for Something to have that balanced against the interests of the public, of the country as a whole.

The job of the Secretary of Energy as well as the Members of Congress is to discern the interest of the general public. You cannot get a consensus if by consensus you mean getting all interested parties to agree on something. If all interested parties agree on something, it is going to be bad policy, by and large.

Ms. JOSEPHSON. How was that responded to? How was your response to that consensus comment responded to?

Mr. FLUG. I think he understood the point. I did not hear Secretary Duncan reiterate those two assertions in his testimony, although I did not hear the entire testimony. I hope he didn't say that. But I think it is extremely crucial, and I think it is one of the reasons why we have not, in Secretary Schlesinger's words at his press conference last week, been able to get a comprehensive energy policy.

I think somebody has the idea that you can balance all the desires, all the wishes, that you can get a consensus that will make everybody happy; you can't. What is going to make Exxon happy basically is not good for the American public. What is good for the American public is by and large not going to meet Exxon's wish list. You have to face up to that.

So it is your job as those who make policy to recognize the fact that the voice of the oil industry is louder than the voice of those who seek to discern and represent the public's point of view, and that ultimately you are the countervailing force and you are the deciding instrument to determine where the public interest truly lies. That is your job. That is the job of the legislative branch and the executive branch.

If it means that you are going to be unpopular with the oil indus try, so be it. Certainly that has never stopped Senator Bayh and many other members of this committee.

[The prepared statement of Mr. Flug follows:]

PREPARED STATEMENT OF JAMES F. FLUG

Mr. Chairman, I would like to thank the committee for the opportunity to testify this morning on S. 1246. We believe this legislation would slow down the oligopolistic growth and concentration of economic and politcal power of the major multinational oil companies and other large oil/energy companies and it would constrain these companies from gobbling up independent, healthy and competitive energy and non-energy related firms.

Certainly in view of the massive synfuels program announced by President Carter last Sunday night, it becomes even more important to restrict the growing power of these companies. If we fail, our future will resemble our past with a few companies controlling the energy marketplace. As William Greider reported in his brilliant May 22, 1977, article in the Washington Post (which we would like to insert into the record):

"The future, whatever it looks like belongs to the people who master the ideasthe know-how that converts laboratory technology into a marketable commodity, whether it is gasoline derived from coal or electric power generated from the sun."

Greider went on to document how the major oil companies have been the primary beneficiaries of the taxpayers' money in the form of grants and contracts for the research and development into synthetic fuels and solar power. While we would urge this committee to address these problems through horizontal divestiture, we believe that it is important to understand that prohibiting the major oil companies from buying up companies with assets over $100 million will not prevent them from dominating the synfuels program, nor from gaining access to other energy sources. Despite the companies' criticisms of this legislation, it is also important to point out that this legislation will certainly not harm capital investment, nor will it harm the financial stature of the oil companies, but it will probably maintain the continued existence of a number of large independent firms which otherwise might have fallen victim to the oil companies' merger mania.

Mr. Chairman, one needs only to have read a newspaper over the last few years to observe the growing trend among this Nation's largest and least competitive enterprises-the major oil companies-to use their excess profits and cash flows from the sale of oil and natural gas to buy into, merge with, acquire and/or otherwise control other major U.S. corporations in both energy and nonenergy-related areas. This trend, which John Shenefield called "disturbing" in his confirmation hearings, has encompassed the acquisition, to name just a few and the most prominent, of Marcor and General Crude Oil by Mobil, Kewanee by Gulf, Anaconda Copper by Arco, Cyprus Mines by Standard of Indiana. AMAX (20 percent) by Socal and now Reliance Electric by Exxon. This trend was not unexpected. Charles T. Maxwell, the respected energy analyst of Cyrus J. Lawrence, has shown how the major companies are becoming cash rich (he calls them the "Great Cash Flow Machines" in his analyses which I would like to submit for the record) and that they will be using their enormous cash flow to buy up companies in other natural resource areas-forest products, copper and other minerals.

These expansions are coming on top of the substantial holdings the major oil companies already have in competing energy resources—coal, uranium, geothermal steam, oil shale, solar. Over the last 20 years these companies have not only brought up independent coal and uranium companies, but have purchased and acquired the bulk of the Nation's leased coal and uranium reserves. Recently, independent solar power companies have been bought out by the majors-these include Solar Power Corp. by Exxon, Tyco Labs by Mobil, SES by Shell and Solarex (a reported 30 percent) by Standard of Indiana. These horizontal acquisitions are in addition to the intertwining web of joint venture relationships existing among the major companies in pipelines and offshore drilling ventures.

Finally, these same companies have a worldwide vertically integrated structure that is both anticompetitive and bars entry into the marketplace. The very fact that these same companies are making an effort to take over more and more of the industrial levers of economic power in this country should concern Congress deeply, especially in view of the past record of illegal activities in which they have engaged.

To understand why legislation such as S. 1246 is both timely and relevant, one need simply to point to the massive transfer of wealth that is now underway from consumers to the major oil companies. The combination of natural gas and crude oil price decontrol and the recent decision by OPEC to raise world prices to $20 per barrel will make these companies enormously and undeservedly rich. Even before the June 26 OPEC meeting, in an analysis we prepared for Senator Eagleton, we showed (based on SEC filings) that 16 major oil companies marked up their domestically produced crude oil as much as 736 percent over the cost of production in 1978. Moreover, the companies' cash flows (net income plus depletion, depreciation, and amortization plus deferred income taxes) which Charles Maxwell has written "are like to be moving up at rates up to 30 percent higher" than the 6 percent to 8 percent increases in annual earnings (this was written before the OPEC price increases and before crude oil decontrol), are so great that most of their outlays are provided by internally generated funds. In the chart we have provided, you will notice that since 1972, not only has the cash flow of the largest oil companies increased by 140 percent, but five out of the seven companies increased the percentage that their internally generated funds represent in terms of outlays.

Despite these severe price increases which have led to both inflation and recession, Mr. Chairman, and despite the pious claims of oil company executives over the past 7 years that higher prices will result in increased reserve additions and production, the opposite has happened. Reserves have declined, production has been reduced. Thus, we have a situation where higher prices have had the effect of lessening, not increasing production. Clearly, the industry either lied about additional reserves or they just refused to make the necessary investments to bring additional production on line and instead used their cash to buy up other industrial firms. Mr. Chairman, as you yourself said when you introduced this legislation, "The power of the major oil companies to further consolidated huge elements of American business and industry is truly awesome." Certainly without this legislation the major oil companies will continue on their planned paths acquisition, merger and takeover. But with this legislation, their voracity will be, at least, somewhat curtailed.

To show why the companies would have to alter some of their plans, I will point to the example of the Sun Oil Co. In the recent court case involving the SEC, Sun Oil and Becton Dickinson, it was revealed that Sun had already developed a so-called "beach head" strategy as a plan by which Sun would use its "$1 billion in excess cash flows" targeted for investments to acquire chunks of companies at about "the 30-ish kind of levels." While Sun, according to the Court, was guilty of violating the securities laws, such a strategy is not per se a violation. But it is precisely this kind of acquisition effort that this bill would prohibit, halting efforts on the part of major oil companies to gain footholds in large numbers of independent firms.

An even clearer example of what is at stake is the recent acquisition of Reliance Electric by Exxon Corp. Exxon claimed to have invented an energy-conservation device for electric motors. On that basis Exxon explained the acquisition as a means to manufacture and distribute this energy-saving device. Exxon's rationale must be questioned not only because Federal Government scientists have already developed such a device, but also because Exxon need not acquire a giant motor company in order to market its product. Exxon could have licensed Reliance, established its own company, or entered into a number of other arrangements short of gobbling up an entire firm. As we pointed out to President Carter in our last minute plea to him to reconsider oil price decontrol. "In what can only be considered a direct slap in the face at you, after you assured the public that oil industry profit increases from decontrol would go into increased exploration for oil, the largest oil company, Exxon, has just offered $1.2 billionthe largest cash takeover offer in the history of American business-for an electric motor company that has nothing to do with oil exploration.”