The Reliance of the Saudi Economy and Adequacy of its Foreign Reserves with Reference to Oil Price Volatility: An Overview

This paper is providing an important overview of the reliance of Saudi Arabia’s economy on oil export revenues. Besides, it is exploring how oil production as natural resources play a significant role in the Saudi Arabian economy. Moreover, it also highlights why the Saudi government pegged its currency to the US Dollar to avoid currency fluctuation and eliminate uncertainties in international transactions if oil prices highly fluctuated. As oil as a commodity is priced in the US dollar, this paper showed how oil price volatility has an impact on both the world economy and Saudi Arabia in particular. The role of oil revenue and accumulation of Saudi foreign assets will be explained, and its economic significance highlighted as well. The oil revenues served in the country’s first five decades to pay for government spending on much-needed infrastructure, but it was evident that the economy at some point had to diversify to avoid the deficit in the government budget when oil revenues shrink. The rationale for the establishment of the Saudi Arabian Monetary Authority (SAMA) was to effectively manage two things: the flow of current account surpluses and the foreign currency reserve. Finally, SAMA is the central bank in Saudi Arabia, and it has continued to play an essential role in the Saudi economy, especially in terms of managing foreign reserves.