Saudi Arabia has long been one of the world’s leading oil exporters, playing a critical role in global energy markets. As the largest producer within the Organization of the Petroleum Exporting Countries (OPEC), the kingdom has shaped oil prices through supply control policies, production adjustments, and geopolitical influence. However, one often-overlooked factor that significantly affects Saudi oil exports is the exchange rate of the Saudi riyal (SAR). Since 1986, the riyal has been pegged to the US dollar at a fixed rate of 3.75 SAR per USD, providing currency stability for oil transactions, which are priced globally in dollars.

The currency peg has allowed Saudi Arabia to maintain a stable macroeconomic environment, ensuring predictable revenue for its oil exports and reducing exchange rate volatility. However, the fixed exchange rate has also limited Saudi Arabia’s monetary policy flexibility, making it dependent on US interest rate movements and global financial conditions. With the rise of economic diversification efforts under Vision 2030, policymakers face increasing debate over whether the riyal’s peg should be maintained, adjusted, or abandoned altogether.

By 2024, fluctuations in global oil demand, shifting geopolitical alliances, and rising inflation pressures have reignited discussions about the impact of the riyal’s exchange rate on Saudi oil exports. While the fixed rate provides short-term stability, some analysts argue that a floating exchange rate could enhance competitiveness and improve economic resilience. This case study examines the role of the Saudi riyal in oil trade, the benefits and challenges of the currency peg, and the potential consequences of changing exchange rate policies on Saudi Arabia’s economic future.

The Role of the Saudi Riyal in Oil Export Pricing

Saudi Arabia’s decision to peg the riyal to the US dollar was primarily driven by the need to stabilize oil revenues, as over 80% of the kingdom’s exports are petroleum-based. Because global oil prices are denominated in US dollars, keeping the riyal fixed against the dollar ensures that Saudi oil revenues remain stable regardless of currency fluctuations in other markets.

The peg also helps reduce exchange rate risk for foreign buyers of Saudi oil, making transactions more predictable for international oil companies and import-dependent economies such as China, India, and Japan. Since these nations are among Saudi Arabia’s largest oil customers, the currency peg enhances trade reliability and minimizes transaction costs for oil purchasers.

However, the downside of the peg is that Saudi Arabia loses control over its monetary policy, as it must follow US Federal Reserve interest rate decisions to maintain the fixed rate. When the US raises interest rates, as it did aggressively in 2022 and 2023 to combat inflation, Saudi Arabia is forced to match those rate hikes to prevent capital outflows and speculative attacks on the riyal. Higher interest rates can slow down economic growth by increasing borrowing costs, making it more difficult for non-oil sectors of the economy to expand.

Another key challenge is the rising global movement toward de-dollarization, where countries such as China and Russia are increasingly pushing for oil trade settlements in alternative currencies such as the Chinese yuan. If oil markets shift away from dollar-based transactions, maintaining a fixed riyal-dollar peg could become less advantageous, forcing Saudi Arabia to reconsider its exchange rate policy.

The Economic Implications of the Currency Peg

The fixed exchange rate has been a double-edged sword for Saudi Arabia’s economic strategy. On one hand, it has provided economic stability, reduced inflation risks, and helped maintain investor confidence. On the other, it has constrained Saudi Arabia’s ability to adjust its exchange rate in response to oil price fluctuations and external economic shocks.

When oil prices fall, Saudi Arabia faces a revenue shortfall, since the riyal cannot depreciate to make Saudi exports more competitive. In such cases, the government is forced to use foreign exchange reserves to support the currency peg, depleting resources that could otherwise be invested in economic development programs. During the 2014-2016 oil price crash, Saudi Arabia burned through over $250 billion in foreign reserves to maintain the peg, raising concerns about the long-term sustainability of the fixed exchange rate system.

In contrast, if the riyal were allowed to float, it would likely depreciate when oil prices decline, making Saudi exports cheaper and more competitive in international markets. A lower exchange rate could help protect Saudi Arabia’s market share in global oil trade, particularly in the face of competition from Russia, the United States, and other oil-producing nations. However, this approach would introduce exchange rate volatility, potentially discouraging foreign investment and complicating long-term trade agreements.

The fiscal stability of Saudi Arabia is also directly tied to the currency peg. The government relies on oil revenues to fund nearly 70% of its annual budget, meaning any disruption in oil income can lead to budget deficits and spending cuts. To maintain the peg, Saudi Arabia has historically adjusted its fiscal policies, cutting subsidies and reducing government expenditures during oil price downturns. While these adjustments help sustain the peg, they can also slow economic diversification efforts and increase social discontent.

Future Prospects: Should Saudi Arabia Reconsider the Peg?

As Saudi Arabia continues implementing Vision 2030, a strategic plan aimed at reducing dependence on oil and expanding industries such as technology, tourism, and finance, policymakers are faced with a critical question: should the riyal remain pegged to the US dollar, or should it adopt a more flexible exchange rate system?

There are compelling arguments for both sides. Proponents of maintaining the peg argue that it ensures stability, supports investment, and aligns Saudi Arabia with global oil markets. A strong, predictable currency peg reduces inflation risks, making it easier for businesses and investors to plan for the long term. It also preserves Saudi Arabia’s role as a key player in dollar-based global oil trade, preventing disruptions in financial markets.

However, advocates for a floating riyal contend that a more flexible exchange rate would allow Saudi Arabia to better respond to external economic conditions, particularly during oil price crashes. A floating riyal could boost competitiveness by making Saudi exports cheaper in international markets while also enabling the government to pursue more independent monetary policies without being forced to mirror US interest rate decisions.

Another alternative is the adoption of a managed float system, where the riyal would be allowed to fluctuate within a controlled range. This approach would offer some flexibility while preventing extreme volatility, allowing Saudi policymakers to intervene when necessary to stabilize the currency.

Ultimately, the decision will depend on Saudi Arabia’s long-term economic strategy and the evolving landscape of global oil trade. As competition in energy markets increases and alternative currencies gain traction, Saudi policymakers may need to reassess whether the benefits of the peg outweigh its constraints.