The Saudi Riyal

ECO209 Instructor: Dr. Farzana Munshi Samiya Yesmin 11304043

The Saudi Riyal

February 13, 2015

Page 2

Figure 1: Saudi Arabia Riyal against Saudi Crude Oil Production. (Source: http://www.tradingeconomics.com)

Figure 2: Nominal Exchange Rate of SAR against USD. (Source: http://www.tradingeconomics.com)

Figure 3: Saudi Balance of Payments. (Source: http://www.tradingeconomics.com)

Figure 4: Crude Oil Price (Source: http://www.nasdaq.com/markets/crude-oil.aspx?timeframe=10y)

The Saudi Riyal

February 13, 2015

Page 3

An Economic Overview of the Saudi Riyal:

Saudi Arabia is an oil-based economy with almost 20% of the world’s total crude oil reserves. It

ranks as the world’s largest petroleum producer as well as exporter. Crude Oil production attributed to

52% of Saudi’s GDP. Hence I have noted the implication of international trade, oil industry and the

Saudi Riyal in my position paper “The Saudi Riyal”.

The valuation of Saudi Arabian Riyal (SAR) has a direct relationship with its crude oil

production. As seen in Figure 1, we see that fluctuations in SAR follow its crude oil production trend. In

2008-2010 we see major fluctuations in oil production and the riyal’s nominal rate because of strong

demand but declining world production, talks of running out of fossil fuels caused a major scare

(Hamilton, 2009). In 2003, Saudi Arabian Monetary Agency (SAMA) officially announced the pegging

of Saudi Arabian Riyals (SAR) to United States Dollars (USD) at 1 SAR=3.7 USD Figure 2. “Currency

pegs allow importers and exporters to know exactly what kind of exchange rate they can expect for their

transactions, simplifying trade. This in turn helps to curb inflation and temper interest rates, thus

allowing for increased trade” (Currencyfair.com, 2015). Thereby KSA follows the same monetary

policies of USA. Currency pegging came about to ensure international trade stabilization. Hence when

comparing the nominal exchange rates of the two currencies, we do not see much of a change. Although

as heavily vested oil based economy, Saudi Arabian currency does show some fluctuations in par with

its oil industry output.

With the start of USA shale oil production there has been unprecedented increase in oil supply,

over 80% from its 2007 production, which has turned the once major importer of oil to become its

exporter. And due to this new oil extraction technique, Fracking, and increasing alternative methods of

energy, the world now has an increase oil supply and a falling oil demand, which has led to lower

exports from KSA since mid 2012 Figure 3. All of which has resulted in a sharp fall in oil prices (about

50%) in 2014, from $110/barrel to $52/barrel) Figure 4. The price of oil depends on 3 factors, supply

and demand, market expectations and international relations with OPEC (Cunningham, 2015). This has

lead to some pretty major fluctuations in oil prices that have shaped our world. In the 70s, we had the

“First Oil Shock” due to the war and the political situation; embargos were placed on petroleum trade by

OAPEC, which lead to stock crash, inflation and eventually a recession. Since the Oil shocks, some

nations have come up with strategic petroleum reserves (SPRs) for economic and national security

during future energy crisis.

This has become a major concern for all oil based economies. Most are hoping to come to a

consensus to decrease oil production which in turn would increase the price as supply falls. But the

Saudi government has no such intentions and continues production at the same rate as before. The

reason behind which is said “to try to instill some discipline among fellow OPEC oil producers, and

perhaps to put the US's burgeoning shale oil and gas industry under pressure”. This decision has now

The Saudi Riyal

February 13, 2015

Page 4

become a major concern for other oil producing countries that are not breaking-even at the current

market price and might be forced out of production, such as Russia and Venezuela, soon if this trend

continues. The implication of a monopoly market is very uncertain. And the future of both the Saudi

Riyal and Oil Price are entering some turbulent times.

Works Cited

1. Cunningham, N. (2015, Jan. 04). investopedia. Retrieved from Determining oil prices:

http://www.investopedia.com/articles/economics/08/determining-oil-prices.asp

2. Currencyfair.com. (2015, Jan. 21). Retrieved from https://www.currencyfair.com/blog/pegged-

currency-affect-exchange-rates/

3. Hamilton, J. D. (2009). Causes and Consequences of the Oil Shock of 2007-08. University of

California, San Diego. San Diego: Brookings Papers on Economic Activity, Spring 2009.

Table of Figures

Figure 1: Saudi Arabia Riyal against Saudi Crude Oil Production. .............................................. 2 Figure 2: Nominal Exchange Rate of SAR against USD. ............................................................... 2 Figure 3: Saudi Balance of Payments. ........................................................................................... 2

Figure 4: Crude Oil Price ............................................................................................................... 2