Malaysia’s Oil Shock Absorption: Adding Agility to the Subsidy Regime

Soaring oil prices are stressing the Madani government’s fuel subsidy regime.

On 7 March, as the US-Israel war on Iran sent oil prices towards the USD100 per barrel mark from USD70 a week before, Prime Minister Anwar Ibrahim assured Malaysians that the country has enough supply to hold prices at RM1.99 per litre for two months. Under the Budi95 programme rolled out in October 2025, almost all Malaysian-licensed motorists (the so-called “bottom 95 per cent” based on income) qualify for subsidised 95 octane (RON95) petrol. The end-May timeline for retaining the subsidised rate spans post-Ramadan celebrations and travels, which commenced on 21 March and typically stretch for a month.

Anwar, who is also the Finance Minister, subsequently announced the dispatch of Sumbangan Tunai Rahmah (STR) cash handouts for 5.2 million low-income households. STR packages were initially timed to help people prepare for Raya festivities, but were delivered under a grim cloud of foreign wars and rising costs.

The subsequent tumult in oil markets triggered a slew of price adjustments. On 11 March, the Ministry of Finance announced price hikes for unsubsidised fuels and designated users: RON97 petrol across the board, diesel for non-commercial users in Peninsular Malaysia and RON95 for foreigners and the richest 5 per cent of Malaysians. The Budi Madani monthly cash transfer – a scheme for farmers, smallholders and low-income individuals introduced alongside diesel subsidy reform in May 2024 – was also increased from RM200 to RM300.

These measures will help relieve Malaysians’ burden of rising costs for a while. Some have already sounded the alarm, however. Notably, the Malaysian Inbound Tourism Association has warned that more expensive diesel would hurt tourism operators. The Anwar administration’s efforts to mitigate energy bills and demonstrate austerity in anticipation of broader belt-tightening, including by cancelling government-sponsored Raya open houses, reducing official overseas travel and initiating discussions about work-from-home arrangements, might win some public goodwill. Yet such moves might upset vendors who have lost catering or event-related contracts, and the cancellations are unlikely to make a dent in the government’s cost reduction when compared to increased subsidy expenditures.

The costs will keep mounting as long as the Strait of Hormuz remains choked. Second Finance Minister Amir Hamzah disclosed official estimates that fuel-related subsidies have ballooned from RM700 million to RM3.2 billion per month. Malaysia’s local refineries are dependent on Gulf crude oil and this makes for a distressing outlook on future supply and prices. The burgeoning diesel subsidy in Sabah and Sarawak has already prompted the formation of a special enforcement committee, chaired by Second Deputy Prime Minister Fadillah Yusof, to monitor and curb fuel smuggling across the border, which is expected to increase, as the gap widens between the subsidised price in East Malaysia and the market price in neighbouring countries.

For diesel, the combination of mass subsidies in Sabah and Sarawak, where diesel-powered vehicles are widespread, and the general subsidy removal in Peninsular Malaysia with targeted Budi Madani cash transfers, has had a longer run, making change difficult. Furthermore, Sarawak is due to hold state elections this year and the GPS political coalition remains a key bloc within the Unity Government coalition. The Anwar administration will especially want to avoid upsetting the Sarawak electorate (which it will do by allowing diesel prices to spike).

Regular price revisions for unsubsidised fuel are already the norm; doing the same for subsidised fuel is difficult, but not impossible.

The federal government has opted for the alternative model of nationwide mass subsidies (with anti-smuggling controls) for RON95, the ubiquitous fuel, due to fears of political backlash towards subsidy removal and any perceived inadequacy of targeted compensatory cash transfers. About 15 million Malaysians claim the Budi95 benefit, averaging around 100 litres per month. Subsidised petrol is a fixture of life; drastic price increases would be financially onerous and politically suicidal for the government.

The Madani administration is politically locked into the subsidy regime for now, yet there is room for agile policy responses. It is too early to make concrete decisions on shouldering the subsidy load, but prudent to begin considering the options. One possibility could be for oil companies operating in Malaysia, especially Petronas, to commit part of their windfall profits to help cover the increased subsidy bill. Petronas’ RM20 billion dividend for 2026 was premised, as with Malaysia’s subsidy cost forecast, on oil being priced at USD60-65 per barrel. This would be a self-regulating measure, since oil subsidy costs and oil export revenues move in tandem.

While raising subsidised fuel prices seems politically intractable, the government could retain discretion if it implements a flexible system. Regular price revisions for unsubsidised fuel are already the norm; doing the same for subsidised fuel is difficult, but not impossible. One way to navigate the volatile oil market is to shift the subsidy to proportional pricing from years-long rigidity (RON95 was maintained at RM2.05 from February 2021 to August 2025).

The current RON95 subsidised price of RM1.99 amounts to about a 40 per cent reduction from the market price of RM3.27. Malaysia could derive a formula for proportionately setting subsidised fuel prices. For instance, a 30 per cent subsidy would translate into RM2.29 per litre and reduce the government’s RON95 subsidy cost by about 23 per cent. If global oil prices fall, the subsidised price would automatically adjust downward.

Such a move can be sold to the public as a reasonable one that adapts to global crises beyond Malaysia’s control, while the government continues to absorb a large chunk of the people’s fuel expenses. Even at RM2.29 per litre, Malaysians would be among those paying the cheapest petrol prices in the world.

Malaysia has cushioned the oil price blow for its citizens for now but faces challenges to the fuel subsidy regime’s sustainability. The Madani government should consider adding agility to the system, enabling social protection and fiscal prudence in an uncertain and volatile world.

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