The Aramco initial public offering might be worth less than quarter of Saudi Arabia’s valuation. Saudi projections have placed Aramco’s potential value at $2 trillion, but analysts at Wood McKenzie Ltd. came up with a very different estimate; $400 billion.

If Wood McKenzie is right Aramco would not be the world’s most valuable company. Its value would actually be worth less than Amazon (NASDAQ: AMZN), Berkshire Hathaway (NYSE: BRK.B), Microsoft (NYSE: MSFT), Alphabet (NASDAQ: GOOG) and Apple (NASDAQ: AAPL), Bloomberg Markets noted. The publicly-traded Aramco would not be worth that much more than Exxon Mobil (NYSE: XOM) which is valued $336 billion.

Last year the Saudi government claimed that Aramco might be larger than Apple, Alphabet, and Amazon combined. Now, Wood McKenzie believes it would actually be smaller than all those companies.

Saudi Redevelopment Plans Threatened

That presents real problems for Saudi Arabia, because the kingdom might earn a fraction of the $100 billion it hopes to raise from a partial IPO of Aramco in 2018, Bloomberg concluded. If that is true, the Saudis will either have to sell a lot more Aramco stock, or find some other means of raising money.

Mohammed Bin Salman, Saudi Deputy Crown Prince, gestures as he speaks during an interview in Riyadh, Saudi Arabia, on Wednesday, March 30, 2016. Source: Saudi Arabia’s Royal Court

It also threatens Deputy Crown Prince Mohammed bin Salman’s ambitious plans to reform his Kingdom. Prince Mohammed had hoped to use funds raised from the IPO to build new industries to replace oil. Now he may not be able to accomplish that or will have to spend far less.

Salman’s plans would require massive investments in high technology which obviously would not come cheap. One has to wonder if he has a backup plan for the IPO’s failure; perhaps selling or leasing oilfields directly to foreign companies, developing some of Saudi Arabia’s other mineral resources or exporting natural gas.

Does anybody know how much Aramco is Really Worth?

Something will have to be done because some other auditors put the valuation at a lower level; an anonymous source told Bloomberg Markets that the real value is $1 trillion. That is still one half of the estimate Salman released last year which certainly calls Saudi Arabia’s credibility into question.

Why should anybody invest in Aramco when nobody seems to have an accurate assessment of its value? An independent auditor is looking over the Saudi books in preparation for the IPO, but that may not help because oil prices are determined by the market.

By the time the audit is complete, the oil price will have changed, so the audit will probably be worthless. Oil prices have collapsed in recent years with crude fetching $53.99 a barrel in New York on February 24, 2017.

Determining the value will be tough because Aramco’s price is based upon its oil reserves, or more precisely upon the future market for those oil reserves. If the demand is not there, the oil’s value is negligible, and with a growing petroleum glut it looks as if the demand is lower.

Saudi Arabia is now the Number Three Oil Country

Another dilemma is that Saudi Arabia no longer has the world’s largest oil reserves; the United States does. That drives oil prices down, because oil is a sideline for the United States.

America can easily afford to discount oil and dump it on the market to deliberately drive down prices, a policy that President Trump is likely to pursue. A nightmare for OPEC is the United States selling oil at half or a third its official price and effectively bankrupting those countries.

Rystad Energy estimated that the US has a reserve of 264 billion barrels of oil, or 52 billion more barrels than Saudi Arabia’s 212 billion, The Financial Times reported. To make matters worse Saudi Arabia is no longer even the world’s number two oil producer. Russia’s reserves of 256 billion barrels are also substantially larger than the kingdom’s.

The Danger from Electric Vehicles

This too greatly diminishes the value of Aramco because much of its value is based on potential oil reserves. The value of those oil reserves is likely to diminish in the years ahead as adoption of electric vehicles speeds up.

Such vehicles are a major threat to oil because electricity is far cheaper and more convenient than oil. A major advantage is that drivers of electrics don’t need to go to the filling station, they can simply plug the car in at night or while they are working. Some recent developments support this thesis which is why Prince Mohammed is moving so quickly on economic reform.

Plans to scrap petrol and diesel vehicles have been floated in a number of countries including Germany, Norway and India. Economics might also favor electric vehicles, Bloomberg New Energy Finance and McKinsey & Company forecast that electric vehicle costs might be competitive with gasoline and diesel burners within five years. One automaker Ford (NYSE: F) plans to invest $4.5 billion in electric vehicle development and bring out 13 electric models by 2020.

Both technological developments and raw oil supply numbers seem to be against Saudi Arabia. The Kingdom’s oil and Aramco will soon have far less value and leave it in a very vulnerable situation.

Market Shows Lowball Estimate of Aramco IPO is Realistic

Wood McKenzie’s estimates sound valid when one takes a look at the revenues, incomes and market capitalizations at major publicly traded oil companies. They’ve collapsed in recent years, leaving the industry a pale shadow of its former self.

Some highlights of the apocalypse in the oil industry include:

• Exxon-Mobil (NYSE: XOM) revenues fell by $185.85 billion between December 2014 and December 2016; dropping from $411.94 billion to $226.09 billion. During the same period income fell from $32.52 billion to $7.84 billion a decline of $24.68 billion. Those numbers caused the market capitalization to fall from $394.70 billion in December 2016 to $337.78 billion on February 27, 2017.

• Chevron (NYSE: CVX) revenues fell by $97.50 billion between 2014 and 2016. Chevron reported revenues of $211.97 billion in December 2014 and $114.47 billion just two years later. During the same period Chevron’s net income fell by $19.737 billion. The company reported $19.24 billion in income in December 2014 and a loss of -$497 million in 2016. Although Chevron’s market cap has remained fairly strong it was $214.09 billion at the end of December 2014 and $211.74 billion on February 27, 2017.

• Petrobas (NYSE: PBR) the situation at the Brazilian oil company should frighten the Saudis to death. In December 2014, Petrobas reported revenues of $145.30 billion, two years later those revenues dropped to $82.15 billion, a decline of $63.15 billion. That gave Petrobas a “net income” of -$15.01 billion in December 2016, down from $7.43 billion in December 2014. Petrobas has reported a negative net income for eight straight quarters. Although strangely enough its market cap has grown during that period rising from $48.2 billion in December 2016 to $66.72 billion on February 27, 2017. What’s truly frightening at Petrobas is its stock price, $10.23 a share on February 27, 2017.

It looks as if oil company market capitalizations are being driven by investors’ faith in oil and little else. The minute that faith disappears prices at other oil producers will fall to the Petrobas level.

This bodes ill for Aramco because its IPO might be valueless as soon as it hits the market. If that occurs, Saudi Arabia might run out of money which may spark civil unrest; and possibly revolution, in the Kingdom. That’s a scenario that might throw the entire Middle East into complete chaos.