It is broadly acknowledged that oil costs impact the economy, it is vague how the relationship changes relying on the accessibility and utilization of the oil in a specific nation or country. Shocks and increase in oil cost in the course of the most recent decade and the developing worldwide irregularity due to expanded globalization require a superior comprehension of the connection between raw petroleum and exchange rate for motivations behind resource exchanging and market regulation (Altarturi, Basheer, Hussin, & Buerhan, 2016)

        There has been a lot of discussion and writing on how the changes in oil prices can affect the exchange rates. Taking in terms of trade an increase in prices of oil will disturb the trade balance for the countries importing oil; this means this devalues the currency of that country. But for countries like Saudi Arabia and other oil producers company benefit as there is inflow of US dollars, this means riyal will strengthen. Another factor in consideration is the shifting wealth factor. As there will be more money leaves the importing countries and exporting countries receiving them. The current account balances will mean strengthening economy for the exporters. The exchange rate is affected by it (Altarturi, Basheer, Hussin, & Buerhan, 2016)

        It is also important to acknowledge the negative correlation between the prices of and exchange rate. In a broader perspective the exchange rate can impact the oil market in terms of trend, demand, supply and the financial markets. This means an oil trading countries Saudi Arabia have their exchange at affected by the trades of oil but due to pegged currency it is mainly affected by dollar reserve as result of trade of oil in dollars. So due to the pegged currency the supply or production is linked to the rate of dollar (Mirza, Rizvi, & Naqvi, 2013)

        The supply will be affected if the value of USD is decreased. The countries to counter the effect of low value of USD to their local currency will limit the production and supply of the oil. This means low supply for high demand that will lead to high price of oil. This will mean covering for the loss due to devaluation of USD. This will stabilize the purchasing power of the supplier. Also decrease in USD means greater demand due to purchasing power. On the other hand if the price of USD goes up the supplier country like Saudi Arabia will increase the production in order to capitalize the opportunity to generate extra revenue.

            The supply and demand with reference to production gives the country a bargaining power in world economy.  If Saudi Arabia starts producing more oil and supplying it, this will mean more revenue but due to more production it will mean the price to fall eventually affecting the economy as reserves will be affected. Cutting on to production will mean that there is more demand and they can increase the price of oil and focus on growth in other industries.  This affects the value of local currency and strengthens it. The inflation drops and can help Saudi Arabia even to disassociate with the pegged currency policy. This will bring more stability and improve overall economic structure of Kingdom of Saudi Arabia. 

References of The Effect of Oil Prices on Economy of Saudi Arabia’s Currency and the U.S Dollar (Analysis on Economy)

Abed, G. (2017). The Saudi riyal/dollar peg: time for a change? Retrieved November 15, 2018, from https://www.ft.com/content/37e30e30-4d13-39d0-bef9-2315c06d8eff

Alkhareif, R. M., Barnett, W. A., & Qualls, J. H. (2017). Has the Dollar Peg Served the Saudi Economy Well? International Finance and Banking, 4(1), 145-162.

Altarturi, Basheer, A., Hussin, M. T., & Buerhan, S. (2016). Oil Price and Exchange Rates: A Wavelet Analysis for Organisation of Oil Exporting Countries Members. International Journal of Energy Economics and Policy, 6(3), 421-430.

Mirza, N., Rizvi, S. K., & Naqvi, B. (2013). The Dynamics of Exchange Rate Regime in Saudi Arabia. Actual Problems of Economics, 147, 430-437.